File No. 333-13609
Rule 424(b)(3)
GROUP AND INDIVIDUAL FLEXIBLE PREMIUM
ANNUITY CONTRACTS
Keyport Life Insurance Company
Executive & Administrative Offices
125 High Street, Boston, Massachusetts 02110
(617) 526-1400
SUMMARY
This Prospectus describes interests in group and individual deferred
annuity contracts ("Contract(s)") which are designed and offered by Keyport
Life Insurance Company ("Keyport" or "Company") to provide retirement
benefits for eligible individuals. Eligible individuals include persons
who participate in certain trusts or certain plans established for eligible
individuals and members of eligible groups. Eligible individuals may also
include persons who collectively form a group of employees of an employer.
As required by certain states, the Contract may be offered as an Individual
Contract. The text that follows and the Glossary of Special Terms at page 6
provide definitions of the defined terms used in this Summary and
throughout the Prospectus.
(This "SUMMARY" section continues on page 2.)
The Contract may be sold by or through banks or other depository
institutions. The Contract and Certificates: are not insured by the FDIC;
are not a deposit or other obligation of, or guaranteed by, the depository
institution; and are subject to investment risks, including the possible
loss of principal amount invested, as described below.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THIS PROSPECTUS SETS FORTH INFORMATION A PROSPECTIVE
CONTRACT OWNER SHOULD KNOW BEFORE PURCHASING A CONTRACT. THIS PROSPECTUS
SHOULD BE RETAINED FOR FURTHER REFERENCE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE OR JURISDICTION IN WHICH SUCH OFFERING
MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED BY KEYPORT TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE,
SUCH UNAUTHORIZED INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON.
SURRENDER OF THESE SECURITIES AT TIMES OTHER THAN THE END OF A TERM COULD
RESULT IN THE RECEIPT OF LESS THAN THE CONTRACT OWNER'S PREMIUM PAYMENT(S).
The date of this Prospectus is May 1, 1998.
Annuities are:
not insured by the FDIC;
not a deposit or other obligation of, or
guaranteed by, the depository institution;
subject to investment risks, including the
possible loss of principal amount invested.
DIA
Allocated and Non-Allocated Certificates are issued under Group Contracts
with Allocated Certificates, each individual's interest is separately
accounted for in a specific account established for that individual. Each
participant in a Non-Qualified plan and in certain Qualified Plans will be
issued an Allocated Certificate evidencing interest in an Allocated
Contract and will have a 100% vested interest in all values credited to the
participant's Account. Under certain Certificates issued with respect to
Qualified Plans ("Non-Allocated Certificates"), however, a participant's
interest may be vested in the Plan in which they are participating rather
than in a Certificate. In such cases, the Certificate will usually be
owned by the Trustee(s) of the Plan, and a single Account will be
established and held on behalf of all participants in the Plan on a
non-allocated basis. Each Account is further accounted for by establishing
Sub-Accounts.
Unless otherwise noted or the context so requires, all references to
"Certificates" include Group Contracts, Allocated and Non-Allocated
Certificates, Certificates issued thereunder, and Individual Contracts.
An Initial Premium of at least $5,000 per Certificate Owner's Account must
accompany the Certificate application or the Enrollment Form for a
participant under an Allocated Certificate. An Initial Premium of $500,000
or more requires Keyport's approval. No premium needs to accompany the
Group Contract Application. The Initial Premium is the only premium
payment required with respect to a particular Certificate. An Index Sub-
Account may be established with a minimum premium payment, transfer, or
Indexed Value upon renewal of $1,000. Eligible individuals may make
Subsequent Premium payments unless the payment will be made within 10 years
of the Income Date. The minimum Subsequent Premium is $1,000; the maximum
is $100,000. (See "Enrollment Form and Premium Payments", page 8.)
Premium payments credited to a Certificate Owner's Account become part of
the General Account assets of Keyport. Keyport owns its General Account
assets, and generally intends to invest these payment amounts in U.S.
Government securities and certain commercial debt securities having
maturities generally matching the applicable Terms. Keyport may also
invest a portion of its assets in various instruments, including equity
options, futures, forwards, and other instruments based on the S&P Index to
hedge its obligations with respect to Index Sub-Accounts. Keyport may also
buy and sell interest rate swaps and caps, Treasury bond futures, and
similar instruments to hedge its exposure to changes in interest rates.
(See "Investments by Keyport", page 16.)
Initial Premium and Subsequent Premium payments may be allocated to two
types of Sub-Accounts; an Interest Sub-Account, and an Index Sub-Account(s)
of varying durations ("Terms"). The Sub-Accounts are the method used to
keep track of a Certificate Owner's values accrued through the crediting of
a declared interest rate on an Interest Sub-Account, or accrued through the
application of Index Increases or Index Decreases, and End-of-Term
Adjustments on an Index Sub-Account. A Certificate Owner may establish
only one Interest Sub-Account to which all premium payments and transfers
may be allocated. A Certificate Owner may establish multiple Index Sub-
Accounts because each premium payment and transfer that is allocated to an
Index Sub-Account establishes a new Index Sub-Account.
Interest Sub-Account
Interest is credited to an Interest Sub-Account at an interest rate
declared (the "Declared Rate") on the first day of each calendar month and
guaranteed for that month. The Declared Rate will never be less than an
effective annual rate of 3%. An Interest Sub-Account has an Accumulated
Value and a Surrender Value which are used to determine death benefits,
transfer and surrender amounts, and annuity values. (See "Interest Sub-
Account", page 8.)
Index Sub-Accounts
Index Sub-Accounts have both an Indexed Value and a Surrender Value.
Interest credited to the Indexed Value ("Index Increases") or decreases in
Indexed Value ("Index Decreases") may be subject to a minimum ("Floor") and
a maximum ("Cap"). As long as the Floor is zero or greater, there will
never be any Index Decreases. Index Increases or Index Decreases are
calculated by reference to Guaranteed Interest Rate Factors, set and
guaranteed at the beginning of the Term for the duration of the Term, which
are applied to changes in the Standard & Poor's 500 Composite Stock Price
Index ("S&P Index") using a formula set forth in the Certificate.
If the publication of the S&P Index is discontinued or the calculation of
the S&P Index is changed substantially, Keyport will substitute a suitable
index.
Index Increases, if any, are based on a percentage (Participation Rate) of
the percentage increase in the S&P Index since the beginning of the Term.
Index Increases are calculated and credited proportionately over the
selected Term on each Index Sub-Account Anniversary. The total Index
Increases that may be applied to an Index Sub-Account during a Term are
subject to a Cap and Floor, both of which are set and guaranteed at the
beginning of the Term. (See "Index Sub-Accounts", page 9.)
If there is no Floor or the Floor is less than zero, and the S&P Index at
the first Sub-Account Anniversary is less than it was at the beginning of
the Term, an Index Decrease is applied to the Indexed Value of the Sub-
Account. If there is no Floor or the Floor is less than zero, and the S&P
Index at the first Sub-Account Anniversary is equal to or higher than it
was at the beginning of the Term, an Index Decrease will never be applied
to the Indexed Value during that Term. Index Decreases are calculated
using the same formula as Index Increases except that the Floor may limit
the amount of any decrease. The Participation Rate determines the
percentage of the decrease which is applied to the Indexed Value and that
decrease is applied proportionately over the selected Term. If there are
subsequent Index Increases, those increases are first offset by the amount
of the Index Decrease applied on each Sub-Account Anniversary. If on a
subsequent Sub-Account Anniversary the S&P Index value exceeds the S&P
Index value at the beginning of the Term, Index Decreases are no longer
proportionately applied to the Indexed Value over the remaining Term and
only Index Increases are credited going forward.
The amount of Index Increases credited to an Index Sub-Account may be more
or less than the amount of interest credited to an Interest Sub-Account.
Index Sub-Accounts also provide for a minimum value called the Surrender
Value to be used in certain circumstances instead of the Indexed Value to
calculate benefits. The Surrender Value of each Index Sub-Account in its
initial Term is equal to: 90% of the premium payment allocated to that
Index Sub-Account or 100% of the amount transferred (See "Transfers", page
3); plus any Sub-Account Anniversary Adjustment in Surrender Value (as
described below); less any partial surrender. Interest is credited to the
net amount at an annual effective guaranteed rate of 3% per year. On each
Sub-Account Anniversary, additional interest, i.e., a "Sub-Account
Anniversary Adjustment in Surrender Value", is credited to an Index Sub-
Account's Surrender Value, so that the total interest credited to the
Surrender Value during a Term will at least be equal to the Index Increases
credited to that Index Sub-Account.
The amount used to calculate death benefits, surrender amounts, and annuity
values of an Index Sub-Account will never be less than the Surrender Value.
If at the end of a Sub-Account Term the Indexed Value is less than the
Surrender Value of that Sub-Account, Keyport will credit interest to the
Sub-Account's Indexed Value so that it equals the Surrender Value. (See
"Surrender Value", page 7, "Index Sub-Accounts," page 9.)
Initial and subsequent Terms of one to ten years may be available. Keyport
may discontinue offering Terms of certain durations or offer Terms of other
durations from time to time. The Terms offered for Initial Terms may
differ from the Terms available upon renewal. The Guaranteed Interest Rate
Factors declared by Keyport may vary depending on the duration of the Term.
Keyport should be contacted to determine the Terms currently being offered.
Factors in Determining the Declared Rate And Guaranteed Interest Rate
Factors
The level of the Declared Rate for an Interest Sub-Account and the
Guaranteed Interest Rate Factors for Index Sub-Accounts set by Keyport will
depend on a variety of factors, including the interest rates generally
available on the types of instruments in which Keyport will invest
Certificate Owners' premium payments, the duration of the Term, regulatory
and tax requirements, sales commissions and expenses borne by Keyport,
general economic trends, and competitive factors.
Risk
IF THERE IS NO FLOOR OR THE FLOOR IS LESS THAN ZERO AND THE S&P INDEX AT
THE FIRST SUB-ACCOUNT ANNIVERSARY IS LESS THAN IT WAS AT THE BEGINNING OF
THE TERM, THE INDEXED VALUE OF AN INDEX SUB-ACCOUNT AT THE END OF THE FIRST
YEAR COULD BE LESS THAN PREMIUM. THEREAFTER, INCREASES IN THE S&P INDEX
WILL PRODUCE INDEX INCREASES THAT ARE FIRST USED TO OFFSET ANY PRIOR INDEX
DECREASES AT ANY ONE OR ALL SUB-ACCOUNT ANNIVERSARIES. (SEE "APPENDIX A",
ILLUSTRATION NO. 3)
Any payment or benefit, interest at the Declared Rate, and Index Increases
credited to Certificate Owner's Sub-Accounts are based on guarantees made
by Keyport. The initial and subsequent Declared Rate and Guaranteed
Interest Rate Factors apply to the original principal sum and reinvested
earnings.
A partial surrender made during a Term will result in the loss of that
portion of previously calculated, but not credited, Index Increases
attributable to the amount surrendered, because Index Increases are
credited and vested over the duration of the Term.
KEYPORT'S MANAGEMENT MAKES THE FINAL DETERMINATION AS TO DECLARED RATE AND
GUARANTEED INTEREST RATE FACTORS TO BE DECLARED. KEYPORT CANNOT PREDICT OR
GUARANTEE FUTURE RATES AND FACTORS.
Renewal of Terms
At the end of each Index Sub-Account Term, a subsequent Term of the same
duration will begin subject to the new Term's Guaranteed Interest Rate
Factors. However, within the thirty (30) day period before the end of the
Term, the Certificate Owner may instruct Keyport otherwise. The
Certificate Owner will have the opportunity to transfer the Indexed Value
to an Interest Sub-Account or choose an Index Sub-Account that has a Term
of any duration then offered (See "Renewal Terms", page 11) except that no
renewal will be allowed into a Term that extends beyond the Income Date or
the maximum date allowed following the death of the Certificate Owner,
Joint Owner, or Annuitant where the Certificate Owner is a non natural
person. (See "Death Provisions", page 14.)
Surrenders: Partial or Total
Subject to certain restrictions, partial and total surrenders of a
Certificate Owner Account are permitted.
PARTIAL SURRENDERS ARE NOT ALLOWED IF YOU HAVE CHOSEN AN INDEX SUB-ACCOUNT
AND THE CERTIFICATE IS ISSUED UNDER A CORPORATE OR KEOGH QUALIFIED PLAN
THAT IS ESTABLISHED PURSUANT TO THE PROVISIONS OF SECTION 401 OF THE
INTERNAL REVENUE CODE.
The minimum partial surrender amount is $250. After a partial surrender,
there must be at least $4,000 Combined Surrender Value remaining in the
Certificate. Each Index Sub-Account must maintain a minimum balance of
$1,000 Surrender Value. There is no minimum balance for an Interest Sub-
Account.
Transfers
Any portion of the values of an Interest Sub-Account may be transferred to
establish a new Index Sub-Account at any time before the Income Date. The
minimum amount that may be transferred from an Interest Sub-Account to an
Index Sub-Account is $1,000.
The values of an Index Sub-Account may be transferred to an Interest Sub-
Account only at the end of the Index Sub-Account's Term. (See "Transfer of
Values", page 14.)
Deferral of Payment
Keyport may defer payment of any partial or total surrender for a period
not exceeding six (6) months from the date of receipt of a request for
surrender or for the period permitted by state insurance law, if less. A
deferral of payment for a period greater than thirty (30) days would occur
only under highly unusual circumstances. (See "Surrender Procedures", page
12).
Annuity Period
On the Income Date, Keyport will pay the designated Annuitant a series of
annuity payments under an Annuity Option. The Annuity Option selected
determines the timing and basis of the annuity payments. (See "Annuity
Payment Provisions", page 15.)
Death Benefit
The Certificate provides for a death benefit if the Certificate Owner dies
before the Income Date or if the Annuitant dies before the Income Date and
the Certificate Owner is not a natural person. Within ninety (90) days of
the date of such death, the Designated Beneficiary may surrender the
Certificate to Keyport for the sum of the Accumulated Value of an Interest
Sub-Account, if any, plus the greater of: (a) the Indexed Value as
adjusted for any proportionate credit for prior Index Increases and any
partial surrenders (see "Death Provisions", page 14) or (b) the Surrender
Value, for all Index Sub-Accounts, if any. If the Floor is greater than
zero, (a) is the Indexed Value as of date of death less any subsequent
partial surrenders.
For surrenders more than ninety (90) days after the date of death and for
surrenders following the death of a Joint Certificate Owner, the Surrender
Value of the Interest and Index Sub-Account(s), will be payable instead.
Premium Taxes
Keyport deducts the amount of any premium taxes levied by any State or
governmental entity when the premium tax is actually paid, unless Keyport
elects to defer such deduction until the time of surrender or the Income
Date. It is not possible to describe precisely the amount of premium tax
payable on any transaction. Such premium taxes depend, among other things,
on the type of Certificate (Qualified or Non-Qualified), on the state of
residence of the Certificate Owner or participant, the state of residence
of the Annuitant, the status of Keyport within such states, and the
insurance tax laws of such states. Currently such premium taxes range from
0% - 5.0%. For a schedule of such taxes, see Appendix C, at page 50 of this
Prospectus.
Annual Reports to Certificate Owners
At least once each Certificate Year, Keyport sends each Certificate Owner a
report showing for each Sub-Account with values at any time during the
year, the following values:
(i) for an Interest Sub-Account, the Surrender Value and
Accumulated Value at the beginning and end of the Certificate
Year; the amount of any surrenders, transfers, and interest
credits during the Certificate Year; and any premium payments
allocated to an Interest Sub-Account during the Certificate Year.
(ii) for each Index Sub-Account, the Surrender Value and Indexed
Value at the beginning and end of the Certificate Year; the
amount of any surrenders during the year; the S&P Index value as
of the most recent Sub-Account Anniversary and the Index Increase
or Index Decrease, if any, during the Certificate Year.
TABLE OF CONTENTS
SUMMARY..........................................................1
GLOSSARY OF SPECIAL TERMS........................................6
DESCRIPTION OF CONTRACTS AND CERTIFICATES........................8
A. Ownership ....................................................8
B. Enrollment Form and Premium Payments
C. Accumulation Period
1. General................................................
2. Interest Sub-Account...................................8
3. Index Sub-Accounts.....................................9
4. Risk Considerations...................................12
5. Surrenders............................................12
6. Dollar Cost Averaging Programs........................13
7. Transfer of Values....................................14
8. Premium Taxes.........................................14
9. Death Provisions......................................14
D. Annuity Payment Provisions...................................15
1. Annuity Benefits......................................15
2. The Income Date and Form of Annuity...................15
3. Change of Annuity Option..............................15
4. Annuity Options.......................................15
5. Frequency and Amount of Payments......................16
6. Proof of Age, Sex, and Survival of Annuitant..........16
INVESTMENTS BY KEYPORT..........................................16
AMENDMENT OF CERTIFICATE........................................17
ASSIGNMENT OF CERTIFICATE........................................
DISTRIBUTION OF CERTIFICATE .....................................
TAX CONSIDERATIONS...............................................
A. General.....................................................
B. Taxation of Keyport........................................17
C. Taxation of Annuities in General...........................18
1. General................................................
2. Surrender, Assignments, and Gifts......................
3. Annuity Payments.......................................
4. Penalty Tax............................................
5. Income Tax Withholding.................................
6. Section 1035 Exchanges................................18
D. Qualified Plans............................................19
1. Tax-Sheltered Annuities................................
2. Individual Retirement Annuities........................
3. Corporate Pension and Profit-Sharing Plans.............
TABLE OF CONTENTS (continued)
Page
THE COMPANY.....................................................19
A. Business...................................................19
General................................................19
B. Selected Financial Data....................................20
C. Management's Discussion and Analysis of Results
of Operations and Financial Condition...................20
1. Results of Operations.................................20
2. Financial Condition...................................22
3. Management of the Company's Investments...............22
4. Liquidity.............................................23
5. Year 2000.............................................23
6. Effects of Inflation..................................24
D. General Account Investments................................24
E. Competition................................................25
F. Employees..................................................25
G. Regulation.................................................25
COMPANY MANAGEMENT.............................................27
EXECUTIVE COMPENSATION TABLES AND INFORMATION..................28
LEGAL PROCEEDINGS..............................................30
EXPERTS........................................................30
CHANGE IN ACCOUNTANTS..........................................31
LEGAL MATTERS..................................................31
FINANCIAL STATEMENTS...........................................34
APPENDIX A (FORMULA FOR INDEX INCREASES
AND/OR DECREASES, AND ILLUSTRATION OF INDEX
INCREASES AND INDEX DECREASES)..................................46
APPENDIX B (CALCULATION OF THE DEATH BENEFIT)...................49
APPENDIX C (SCHEDULE OF STATE PREMIUM TAXES)....................50
APPENDIX D (TELEPHONE INSTRUCTIONS).............................51
GLOSSARY OF SPECIAL TERMS
The following terms in this Prospectus have the indicated meanings:
Accumulated Value The value of an Interest Sub-Account, equal to all
allocations or transfers to an Interest Sub-Account, less all amounts
transferred or surrendered from an Interest Sub-Account, plus all interest
credited to an Interest Sub-Account. (See "Interest Sub-Account").
Allocated Certificate A Certificate under which amounts are allocated or
credited to the account of one individual participant.
Annuitant The natural person upon whose life annuity payments are based and
to whom any annuity payments will be made starting on the Income Date.
Annuity Options Options available for annuity payments.
Cap The maximum percentage by which the Indexed Value of an Index Sub-
Account may increase during a single Term.
Certificate The document issued to each Certificate Owner evidencing his or
her interest in the Group Annuity Contract. The term Certificate also
includes any Group Contract and any Individual Contract, unless the context
requires otherwise.
Certificate Anniversary, Certificate Year A continuous twelve-month period
commencing on the Certificate Date and each anniversary thereof.
Certificate Date The date a Certificate is issued and the Certificate
Owner's rights and benefits begin.
Certificate Owner Such person, persons, or entity who are entitled to the
ownership rights stated in the Certificate and in whose name(s) the
Certificate is issued.
Certificate Owner Account The Account established under a Certificate for
all of the values attributable to a Certificate Owner and accounted for
separately by Certificate Owner Sub-Accounts.
Certificate Owner Sub-Account The accounting method used to value and
maintain records of each Certificate Owner's values under a Certificate.
Interest and/or Index Sub-Account(s) are established by Keyport for a
Certificate Owner under which the Initial Premium and any Subsequent
Premium paid by or on behalf of a Certificate Owner or transfers are
recorded.
Contract Owner The person, persons, or entity entitled to the ownership
rights stated in a Group or Individual Contract and in whose name(s) the
Contract is issued.
Declared Rate The rate of interest declared and guaranteed by Keyport at
the beginning of each calendar month which is used to calculate the
interest to be credited to an Interest Sub-Account.
Designated Beneficiary The person who may be entitled to receive benefits
following the death of the Annuitant, the Certificate Owner, or the Joint
Certificate Owner. The Designated Beneficiary will be the first person
among the following who is alive on the date of death: Certificate Owner,
Joint Certificate Owner, Primary Beneficiary, Contingent Beneficiary, and,
otherwise, the Certificate Owner's estate. If the Certificate Owner and
Joint Certificate Owner are both alive, they will together constitute the
Designated Beneficiary.
Enrollment Form A document signed by a participant that serves as his or
her application for participation under an Allocated Certificate.
Floor If the Floor is a positive number or zero, it represents the minimum
percentage by which the Indexed Value of an Index Sub-Account may increase
during a single Term. If the Floor is a negative number or there is no
Floor, it represents the maximum percentage by which the Indexed Value of
an Index Sub-Account may decrease during a single Term.
General Account Keyport's general investment account which contains all of
Keyport's assets, except those in separate accounts.
Guaranteed Interest Rate The rate of interest which when compounded will
equal an annual rate of 3%.
Guaranteed Interest Rate Factors The Participation Rate, Cap, and Floor,
which are set and guaranteed by Keyport at the beginning of each Term of an
Index Sub-Account and used to calculate Index Increases and Index Decreases
under a formula set forth in the Certificate and described in Appendix A.
Income Date The date on which annuity payments to an Annuitant are to
begin. The Income Date is the Annuitant's 90th birthday unless state law
requires an earlier date.
Income Value The sum under a Certificate of the Accumulated Value for an
Interest Sub-Account and the Indexed Value in each Index Sub-Account on the
Income Date.
Index Decrease A negative adjustment of Indexed Value which is calculated
using the Guaranteed Interest Rate Factors as applied to percentage changes
in the S&P Index. This can only occur if there is no Floor or the Floor is
less than zero and the S&P Index value on the first Sub-Account Anniversary
of a Term is lower than it was at the beginning of the Term.
Index Increase Interest credited to an Index Sub-Account, which is
calculated using the Guaranteed Interest Rate Factors as applied to
percentage changes in the S&P Index.
Index Sub-Account A Certificate Owner Sub-Account to which Keyport applies
Index Increases and Index Decreases.
Indexed Value The value of an Index Sub-Account, equal to all allocations,
transfers from the Interest Sub-Account to establish the Index Sub-Account,
or renewals of that Index Sub-Account, plus all Index Increases credited to
the Index Sub-Account, or less Index Decreases if the Floor is less than
zero or there is no Floor, plus any End-Of-Term Adjustments, less all
amounts surrendered from the Index Sub-Account.
Individual Certificate A Certificate issued to a natural person or a
trustee as Certificate Owner.
In Force The status of a Certificate before the Income Date, so long as it
is not totally surrendered and there has not been a death of the Annuitant
or any Certificate Owner that would cause the Certificate to end within, at
most, five (5) years from the date of death.
Initial Premium The premium payment which must be submitted with the
application for a Certificate.
Interest Sub-Account The Certificate Owner Sub-Account to which Keyport
credits interest based on a monthly declared and guaranteed rate of
interest. Each Certificate Owner has one Interest Sub-Account.
Joint Certificate Owner Any person designated by the Certificate Owner
jointly to possess rights in the Certificate Owner Account. Keyport
requires that the Certificate Owner and any Joint Certificate Owner act
together.
Non-Allocated Certificate A Certificate under which a single account is
established on behalf of all participants in a particular plan of an
employer or other eligible entity on a non-allocated basis.
Non-Qualified Certificate Any Certificate that is not issued under a
Qualified Plan.
Office Keyport's executive office, which is at 125 High Street, Boston,
Massachusetts 02110.
Participation Rate The percentage of the percentage increase or decrease in
the S&P Index used in the formula to calculate Index Increases or Index
Decreases.
Qualified Certificate Any Certificate issued under a Qualified Plan.
Qualified Plan A retirement plan established pursuant to the provisions of
Sections 401, 403 and 408 of the Internal Revenue Code of 1986, as amended,
and HR-10 Plans for self-employed persons.
S&P Index Standard & Poor's 500 Composite Stock Price Index, also referred
to as the "S&P 500 Index" and "S&P 500" which is used to calculate Index
Increases and Index Decreases.
Sub-Account Year, Sub-Account Anniversary A continuous twelve-month period
commencing on the date that an Index Sub-Account is opened by allocation,
transfer, or renewal and each anniversary thereof, including the end of any
applicable Term of an Index Sub-Account.
Subsequent Premium Any premium payment made after the Initial Premium is
submitted.
Surrender Value The guaranteed minimum value of each Sub-Account,
calculated as described in this Prospectus. The Surrender Values of an
Interest Sub-Account and Index Sub-Accounts are calculated separately by
differing formulas. The sum of the Surrender Values in an Interest Sub-
Account and the Index Sub-Account(s) is referred to as the Combined
Surrender Value.
Term The period for which Guaranteed Interest Rate Factors are used to
calculate Index Increases or Index Decreases for an Index Sub-Account.
Terms may be selected by a Certificate Owner from among those offered by
Keyport.
Written Request A written request in a form satisfactory to Keyport,
signed by the Certificate Owner, and received at Keyport's Office.
DESCRIPTION OF CONTRACTS AND CERTIFICATES
A. OWNERSHIP
The Certificate Owner is the individual or legal entity that has the power
to exercise the rights of an owner under the Certificate. The Certificate
Owner is the person or entity designated in the application for a
Certificate or the individual so designated in the Enrollment Form for an
Allocated Certificate.
The Certificate Owner may exercise all rights summarized in the
Certificate. Joint Certificate Owners are permitted but not contingent
Certificate Owners. Prior to the Income Date, the Certificate Owner
together with any Joint Certificate Owner may, by Written Request, change
the Certificate Owner, Joint Certificate Owner, Beneficiary, Contingent
Beneficiary, Contingent Annuitant, or in certain instances, the Annuitant.
An irrevocably-named person may be changed only with the written consent of
such person.
Because a change of Certificate Owner by means of a gift (i.e., a transfer
without full and adequate consideration) may be a taxable event, a
Certificate Owner should consult a competent tax advisor as to the tax
consequences resulting from such a transfer.
Any Qualified Certificate may have limitations on transfer of ownership. A
Certificate Owner should consult a competent tax advisor as to the tax
consequences resulting from such a transfer.
B. ENROLLMENT FORM AND PREMIUM PAYMENTS
The Initial Premium is due on the Certificate Date. The Initial Premium
may not be less than $5,000. There is a maximum of $500,000 for the
Initial Premium. Payments of $500,000 or more require Keyport approval.
Certificate Owners may purchase multiple Certificates, although Keyport
reserves the right to limit the total premiums paid on multiple
Certificates with respect to any one Certificate Owner. Keyport may reject
any premium payment.
The Initial Premium is credited to a Certificate Owner Account, which is
established on the date of receipt of a properly completed application or
Enrollment Form along with the required premium payment. Keyport will
issue a Certificate and confirm the receipt of the Initial Premium in
writing. If the Certificate is issued on a Non-Allocated basis, a single
Certificate Owner's Account is opened for the Certificate Owner. A
Certificate Owner Account starts earning interest on the day following the
date the Certificate Owner Account is established on his or her behalf. A
Certificate Owner may choose to allocate the Initial Premium to an Interest
Sub-Account and/or one or more Index Sub-Accounts, as described below.
In the event Keyport determines that an application or Enrollment Form is
not properly completed, Keyport will attempt to contact the Certificate
Owner by letter or telephone to obtain the information necessary to
complete the form.
Keyport will return the Initial Premium and any improperly completed
application or Enrollment Form, along with the corresponding premium
payment, which cannot be properly completed within three weeks of its
receipt.
Keyport will permit others to act on behalf of an applicant in certain
instances, including the following two examples. First, Keyport will
accept an application for a Certificate that contains a signature signed
under a power of attorney, if a copy of that power of attorney is submitted
with the application. Second, Keyport will issue a Certificate that is
replacing an existing life insurance or annuity policy that was issued by
either Keyport or an affiliated company without having previously received
a signed application from the applicant. Certain dealers or other
authorized persons such as employers and Qualified Plan fiduciaries will
inform Keyport of an applicant's answers to the questions in the
application by telephone or by order ticket and cause the Initial Premium
to be paid to Keyport. If the information is in good order, Keyport will
issue the Certificate with a copy of an application completed with that
information. The Certificate will be delivered to the Certificate Owner
with a letter from Keyport that will give the Certificate Owner an
opportunity to respond to Keyport if any of the application information is
incorrect. Alternatively, Keyport's letter may request the Certificate
Owner to confirm the correctness of the information by signing either a
copy of the application or a Certificate delivery receipt that ratifies the
application in all respects. (In either case, a copy of the signed
document would be returned to Keyport for its permanent records.) All
purchases are confirmed, in writing, to the applicant by Keyport.
Keyport's liability extends only to purchases so confirmed.
Eligible individuals may make Subsequent Premium payments; the minimum and
maximum of which are $1,000 and $100,000 respectively. Subsequent Premium
Payments may not be made after the first Certificate Year if the
Annuitant's age is within 10 years of the Income Date. Subsequent Premium
will be allocated to Sub-Accounts based on the Certificate Owner's
instructions. In the absence of instruction, the Subsequent Premium will
be added to an Interest Sub-Account.
C. ACCUMULATION PERIOD
1. General
This Certificate consists of a series of Sub-Accounts, including a single
Interest Sub-Account and multiple Index Sub-Accounts. A new Index Sub-
Account is created every time a premium payment is allocated or a transfer
is made to establish a new Index Sub-Account. All benefits under this
Certificate are calculated by first calculating the appropriate value of
each Sub-Account and then aggregating all Sub-Account values to get the
values of a Certificate Owner Account.
Amounts allocated to an Interest Sub-Account will earn interest and amounts
allocated to an Index Sub-Account may earn Index Increases.
2. Interest Sub-Account
Any amount allocated to an Interest Sub-Account will earn interest at a
rate calculated and credited daily based on the Declared Rate. The
Declared Rate is an annual effective interest rate that will be credited
when daily interest credits have compounded for a full year. The Declared
Rate is set by Keyport on the first business day of each calendar month and
is guaranteed for that month. The Declared Rate will never be less than a
rate which when compounded will equal a 3% annual rate. Thus, the Declared
Rate has a guaranteed component and may include interest in excess of the
guaranteed component.
The determination of the Declared Rate will be reflective of interest rates
generally available on the types of investments in which Keyport intends to
invest the proceeds attributable to Certificate Owner Interest Sub-
Accounts. (See "Investments by Keyport".) In addition, Keyport's management
may consider various other factors in determining Declared Rates for a
given period, including regulatory and tax requirements, sales commissions
and administrative expenses borne by Keyport, general economic trends, and
competitive factors. KEYPORT'S MANAGEMENT WILL MAKE THE FINAL
DETERMINATION AS TO THE DECLARED RATE.
An Interest Sub-Account will have an Accumulated Value and a Surrender
Value.
The Accumulated Value is equal to the Initial and Subsequent Premiums
allocated to an Interest Sub-Account plus any transfers to an Interest Sub-
Account, less amounts transferred or surrendered from an Interest Sub-
Account. Interest at the Declared Rate is credited to this net amount.
The Accumulated Value is available only during three time periods. First,
as a surrender payable if all or part of an Interest Sub-Account is
surrendered within the first 5 days of any calendar month. Second, as a
Death Benefit that is payable if the Certificate is surrendered within 90
days after the date of certain deaths. Third, as a value applied on the
Income Date to determine the amount of income payments. At all other
times, the Surrender Value is available while the Certificate is In Force.
The Surrender Value at any time is equal to 90% of the Initial and
Subsequent Premiums allocated to an Interest Sub-Account plus any Surrender
Values transferred to this Sub-Account from any Index Sub-Account less
Surrender Values transferred or surrendered from this Sub-Account.
Interest, both guaranteed and excess, is credited to this net amount.
Guaranteed interest is credited daily at a rate which when compounded will
equal a 3% annual rate.
Excess interest is the excess, if any, of interest credited to the
Accumulated Value over interest credited to the Surrender Value from the
last date of excess interest credits to the current date. Excess interest
is added on the first of each calendar month plus on any date of a transfer
or surrender from this Sub-Account.
On each Certificate Anniversary within 10 years of the Income Date, if the
Accumulated Value exceeds the Surrender Value, then the Surrender Value
will be increased by 1% of the Accumulated Value, but not to an amount
greater than the Accumulated Value.
3. Index Sub-Accounts
Multiple Index Sub-Accounts may be open at any time. Each Index Sub-
Account that is open will have its own Term, Participation Rate, Cap, Floor
and values. All of the descriptions below are for a single Index Sub-
Account. All activities that are described herein relate to activities
within a specific Index Sub-Account (i.e., a partial surrender describes a
partial surrender from a particular Index Sub-Account).
An Index Sub-Account will have an Indexed Value and a Surrender Value. The
Indexed Value is available only during three time periods. First, as a
surrender payable if the Index Sub-Account is surrendered within 45 days
after the end of its Term. Second, as a Death Benefit that is payable if
the Certificate is surrendered within 90 days after the date of certain
deaths. Third, as an amount applied on the Income Date to determine the
amount of income payments. At all other times, the Surrender Value is
available while the Certificate is In Force.
The Indexed Value is equal to the premium payment allocated to or the
Accumulated Value transferred to the Index Sub-Account, plus or minus any
Index Increase or Index Decrease, plus End-Of-Term Adjustments less any
partial surrenders.
Index Increases are determined on each Sub-Account Anniversary using the
S&P Index and the Participation Rate, Floor and Cap. This calculation may
result in an Index Decrease only if there is a reduction in the S&P Index
on the first Sub-Account Anniversary of a Term and there is no Floor or the
Floor is less than zero. Any Index Increase or Index Decrease will be
proportionately spread over the remainder of the Term (See "Appendix A").
Keyport will calculate and apply Index Increases and Index Decreases to a
Sub-Account at each Sub-Account Anniversary after the start of a Term. The
Certificate contains a formula for using the S&P Index and the Guaranteed
Interest Rate Factors established at the beginning of the Term to calculate
the Index Increases and Index Decreases on each Sub-Account Anniversary in
the Term. All Index Increases and Index Decreases are applied to the Sub-
Account proportionately over the entire Term. Thus, an Index Increase or
Index Decrease attributable to the first year in a five year Term will be
applied over the first to fifth years in equal amounts. (See "Appendix A",
Illustrations 1-6), except that following an Index Decrease, if the S&P
Index on any subsequent Sub-Account Anniversary in a Term, exceeds the S&P
Index at the beginning of the Term, Index Decreases will no longer be
applied.
The first part of the formula calculates the proportionate credit for any
increase in the S&P Index from its prior highest Sub-Account Anniversary
value to its new highest value on the current Sub-Account Anniversary. The
second part determines the proportionate credit for any change in the S&P
Index occurring on a prior Sub-Account Anniversary(ies). The second part
is always zero on the first Sub-Account Anniversary in a Term.
THIS SECTION APPLIES IF THE FLOOR IS ZERO OR GREATER
At the first Sub-Account Anniversary of a Term, the Index Increase, if any,
is calculated by multiplying, (i) the Participation Rate by (ii) the change
in the S&P Index from the beginning of the Term to the first Sub-Account
Anniversary divided by its beginning of Term value. The result is then
divided by the number of years in the Term. This percentage is then
multiplied by the smaller of the Indexed Value at the beginning of the Term
and the Indexed Value (prior to the crediting of any Index Increases) on
the first Sub-Account Anniversary.
After the first Sub-Account Anniversary in any Term;
Part one is calculated as follows:
Multiply, (i) the Participation Rate by (ii) any increase in the S&P Index
from its prior highest Sub-Account Anniversary value to its current highest
Sub-Account Anniversary value divided by its beginning of Term value. The
result is then multiplied by the ratio of the number of completed Sub-
Account Years in the Term to the total number of Sub-Account Years in the
Term. This percentage is then multiplied by the smaller of the Indexed
Value at the beginning of the Term and the Indexed Value (prior to the
crediting of any Index Increases) on any Sub-Account Anniversary in the
Term.
Part two is calculated as follows:
Multiply, (i) the Participation Rate by (ii) the percentage change in the
S&P Index since the beginning of the Term, calculated using the highest
value attained by the S&P Index at any Sub-Account Anniversary during the
Term excluding the value of the S&P Index at the beginning of the Term and
on the current Sub-Account Anniversary. Divide the resulting percentage by
the number of Sub-Account Years in the Term. This percentage is then
multiplied by the smaller of the Indexed Value at the beginning of the Term
and the Indexed Value (prior to the crediting of any Index Increases) on
any Sub-Account Anniversary in the Term.
THIS SECTION APPLIES IF THERE IS NO FLOOR OR THE FLOOR IS LESS THAN ZERO
At the first Sub-Account Anniversary of a Term, the Index Increase or the
Index Decrease is calculated by multiplying, (i) the Participation Rate by
(ii) the change in the S&P Index from the beginning of the Term to the
first Sub-Account Anniversary, divided by its beginning of Term value. The
result is then divided by the number of years in the Term. This percentage
is then multiplied by the smaller of the Indexed Value at the beginning of
the Term and the Indexed Value (prior to the crediting of any Index
Increase or Index Decrease) on the first Sub-Account Anniversary.
If there is no decrease in the S&P Index on the first Sub-Account
Anniversary of a Term, there will not be any Index Decreases during the
Term.
After the first Sub-Account Anniversary, the following two-part calculation
is used to determine any Index Increases and proportionately distribute the
first year decrease, if any, and any subsequent increases over the
remainder of the Term.
Part one is calculated as follows:
Multiply, (i) the Participation Rate by (ii) any increase in the S&P Index
from its prior highest Sub-Account Anniversary value to its current highest
Sub-Account Anniversary value divided by its beginning of Term value. The
result is then multiplied by the ratio of the number of completed Sub-
Account Years in the Term to the total number of Sub-Account Years in the
Term. This percentage is then multiplied by the smaller of the Indexed
Value at the beginning of the Term and the Indexed Value (prior to the
crediting of any Index Increases) on any Sub-Account Anniversary in the
Term.
Part two is calculated as follows:
Multiply, (i) the Participation Rate by (ii) the percentage change in the
S&P Index since the beginning of the Term, calculated using the highest
value attained by the S&P Index at any Sub-Account Anniversary during the
Term excluding the value of the S&P Index at the beginning of the Term and
on the current Sub-Account Anniversary. Divide the resulting percentage by
the number of Sub-Account Years in the Term. This percentage is then
multiplied by the smaller of the Indexed Value at the beginning of the Term
and the Indexed Value (prior to the crediting of any Index Increases or
Index Decreases) on any Sub-Account Anniversary in the Term.
THIS SECTION APPLIES IN ALL INSTANCES
Any Index Increases calculated above may be reduced if the Cap is
applicable and increased if a Floor in excess of zero is applicable. Index
Decreases may be reduced if a Floor is applicable. The sum of the two
parts of the formula equals the total amount that is added to the Sub-
Account Indexed Value. If the S&P Index on each Sub-Account Anniversary in
a Term is less than the S&P Index at the beginning of the Term, there will
not be any Index Increases credited during the Term, and there will be an
Index Decrease if there is no Floor or the Floor is less than zero.
In the event the S&P Index increases on a Sub-Account Anniversary during a
Term, the effect of this formula is to provide that, in the absence of any
Index Decreases or any partial or total surrender during a Term, the total
Index Increases, if any, credited to an Index Sub-Account during a Term
will equal the Sub-Account Indexed Value at the beginning of the Term
multiplied by a percentage (Participation Rate) of the percentage increase
in the S&P Index since the beginning of the Term (subject to the Cap and
the Floor), using the highest value attained by the S&P Index on any Sub-
Account Anniversary in the Term, excluding the value of the S&P Index at
the beginning of the Term and on the current Sub-Account Anniversary.
In the event the S&P Index value decreases on the first Sub-Account
Anniversary of a Term, the effect of this formula is to provide that, in
the absence of any subsequent Index Increases or any partial or total
surrender during a Term, the total Index Decreases, if any, applied to an
Index Sub-Account during a Term will equal the Indexed Value at the
beginning of the Term multiplied by a percentage (Participation Rate) of
the percentage decrease in the S&P Index since the beginning of the Term
(subject to the Floor), using the value attained by the S&P Index on the
first Sub-Account Anniversary of a Term.
Partial surrenders in excess of Index Increases or Index Decreases will
reduce the amount of the Index Increases or Index Decreases credited after
such surrender, but do not affect the portion of Index Increases or Index
Decreases previously applied.
Total Index Increases credited to an Index Sub-Account may be more or less
than the amount of interest credited to an Interest Sub-Account established
at the same time, depending on the change in the S&P Index and the
Guaranteed Interest Rate Factors over the course of the Term.
The formula may produce Index Increases or Index Decreases to the Indexed
Value, or the Indexed Value may remain unchanged. Over time, the Indexed
Value of an Index Sub-Account may be less than the Surrender Value of that
same Index Sub-Account. In those circumstances, the Surrender Value is
used to calculate any benefit payable under the Certificate. In addition,
if at the end of a Term, the Indexed Value of an Index Sub-Account is less
than the Surrender Value of that Sub-Account, Keyport will credit the
Indexed Value with an End of Term Adjustment equal to the excess of the
Surrender Value over the Indexed Value.
The Surrender Value of an Index Sub-Account at any time is equal to the
initial Surrender Value plus any Sub-Account Anniversary Adjustments
(defined below), less any partial surrenders. Interest is credited to the
net amount at an annual effective rate of 3%.
A Sub-Account Anniversary Adjustment occurs when the Indexed Value and the
Surrender Value are compared on each Sub-Account Anniversary. If (a) the
Indexed Value exceeds the Surrender Value and (b) the total to date of all
Index Increases or Index Decreases applied during the Term exceed "all
increases in the Surrender Value during the Term", then the Surrender Value
will be increased by the difference between the two amounts in (b). "All
increases in the Surrender Value during the Term" equal the total to date
during the Term of all prior Sub-Account Anniversary Adjustments to the
Surrender Value and all interest credited to the Surrender Value (the
interest for each Sub-Account equals: the Surrender Value at the end of
the Sub-Account year plus the amount of any partial surrender(s) during the
Sub-Account year, less the Surrender Value at the start of the Sub-Account
year).
After the above adjustment, on each Sub-Account Anniversary within 10 years
of the Income Date, if the Indexed Value exceeds the Surrender Value, then
the Surrender Value will be increased by the lesser of (a) and (b), where:
(a) is 1% of the Indexed Value multiplied by the number of
elapsed Sub-Account Anniversaries within this 10-year period,
less any prior increases that were made pursuant to this
provision; and
(b) is the difference between the Indexed Value and the
Surrender Value.
The initial Surrender Value of an Index Sub-Account is equal to ninety
percent (90%) of the premium allocated to the Index Sub-Account if opened
by a premium payment, and one hundred percent (100%) of the Surrender Value
transferred to the Index Sub-Account if opened by a transfer.
Currently the index is the Standard & Poor's 500 Composite Stock Price
Index ("S&P Index"). The S&P Index is a widely accepted and broad measure
of the performance of the major United States stock markets. The S&P Index
is a market value weighted measure of changes in the prices of the
underlying securities and does not reflect any stock dividend income on the
underlying securities. "S&Pr", "S&P 500r", and "Standard & Poor's 500" are
trademarks of The McGraw Hill Companies, Inc., and have been licensed for
use by Keyport. The Certificate is not sponsored, endorsed, sold, or
promoted by Standard & Poor's and Standard & Poor's makes no representation
regarding the advisability of purchasing the Certificate.
If the publication of the S&P Index is discontinued, or the calculation of
the S&P Index is changed substantially, Keyport will substitute a suitable
index and notify the Certificate Owner.
The formula used to calculate Index Increases and Index Decreases and
illustrative examples are set forth in Appendix A.
Renewal Terms. For Index Sub-Accounts, a new Term will begin automatically
at the end of a Term, unless a Certificate Owner elects a total surrender.
(See "Surrenders".) Prior to the end of each Term of each Index Sub-
Account, Keyport will notify the Certificate Owner of the durations
available for the next Terms. A Certificate Owner may choose from among
the Terms offered by Keyport at that time. Keyport may discontinue
offering Terms of certain durations currently available or offer Terms of
different durations from time to time. The then available Guaranteed
Interest Rate Factors may vary based on the duration of the Term selected
and may differ from the rates currently available for new Certificates.
The Certificate Owner may not select a Term for a period longer than the
number of years remaining until the Income Date or beyond the maximum date
allowed following the death of a Certificate Owner, Joint Certificate
Owner, or Annuitant, if the Owner is a non-natural person. If the selected
Term exceeds these limits, Keyport will automatically transfer the value of
the Index Sub-Account to the Interest Sub-Account.
The Indexed Value at the beginning of any subsequent Term will be equal to
the value at the end of the previous Term. In the absence of any partial
or total surrender or transfer (the effects of which are described below),
the Indexed Value will earn and be credited with any Index Increases for
each year in the subsequent Term, using the Guaranteed Interest Rate
Factors established at the beginning of the subsequent Term selected by the
Certificate Owner or established by default (as described above) in the
absence of other instructions. The Surrender Value at the beginning of any
subsequent Term will be equal in value to the Surrender Value at the end of
the prior Term. The Indexed Value at the beginning of a new Term can be
greater than or equal to, Surrender Value depending on Index Increases,
Index Decreases, and surrenders during the prior Term. As a result, the
initial Surrender Value for a new Term will be equal to or less than the
initial Indexed Value for the new Term bearing the same relationship
between indexed Value and Surrender as was determined at the end of the
prior Term. For example, if the Surrender Value was 95% of the Indexed
Value at the end of the prior Term, it will be 95% of the initial Indexed
Value for the new Term. Absent any partial surrenders in the prior Term,
the initial Surrender Value will never be less than 90% of the initial
Indexed Value in the new Term.
Establishment of Guaranteed Interest Rate Factors. Guaranteed Interest
Rate Factors for initial and renewal Terms will be established
periodically. Keyport will declare Guaranteed Interest Rate Factors for
the Term chosen at the time of the initial purchase or at the time of
renewal. Differing Guaranteed Interest Rate Factors may be established for
Terms of different durations. Keyport also may offer differing Guaranteed
Interest Rate Factors for initial allocations, transfers, and renewal
Terms.
Keyport has no specific formula for determining the Guaranteed Interest
Rate Factors that it will declare in the future. KEYPORT'S MANAGEMENT WILL
MAKE THE FINAL DETERMINATION AS TO GUARANTEED INTEREST RATE FACTORS TO BE
DECLARED. KEYPORT CANNOT PREDICT OR GUARANTEE FUTURE GUARANTEED INTEREST
RATE FACTORS.
Information on Renewal Rate Factors. A Certificate Owner is provided with
a toll-free number to call to inquire about Guaranteed Interest Rate
Factors for Terms then being offered. In addition, prior to the beginning
of each subsequent Term, Keyport will notify the Certificate Owner in
writing of the Terms available. Guaranteed Interest Rate Factors will be
declared prior to renewal. At the end of any Term, a Certificate Owner has
the opportunity to select any other duration of Term then being offered.
4. Risk Considerations
The interest rates and Index Increases credited to a Certificate Owner's
Account are based on guarantees made by Keyport. The initial and
subsequent Guaranteed Interest Rates and Guaranteed Interest Rate Factors
apply to the original principal sum and reinvested earnings. The amount of
any Index Increases credited to an Index Sub-Account may be more or less
than the amount of interest credited to an Interest Sub-Account. Moreover,
it is possible that an Index Decrease will be applied at each subsequent
Index Sub-Account Anniversary after the first if the S&P Index does not
exceed its beginning value on any subsequent Index Sub-Account Anniversary
in a Term. If the Floor established for a Term is less than zero, and the
S&P Index is lower on the first Sub-Account Anniversary than it was at the
beginning of the Term, it could result in an Indexed Value that is less
than principal (i.e., premium payments).
5. Surrenders
General.
A Certificate Owner may make a partial or total surrender of the
Certificate Owner's Account at any time prior to the Income Date while the
Certificate is In Force, subject to the conditions described below.
Partial surrenders may be requested from any specified Sub-Account, either
an Interest Sub-Account or any Index Sub-Account. Partial and total
surrenders are not subject to a surrender charge. However, the values
available for surrender may differ depending on the timing of the
surrender. For example, in the Interest Sub-Account, the Accumulated Value
is available during the first five (5) days of every month. At all other
times, the Surrender Value is available. The available value in an Index
Sub-Account during the first forty-five (45) days of a new Term is the
greater of the Indexed Value and Surrender Value. After forty-five (45)
days, only the Surrender Value is available.
Partial Surrenders.
At any time prior to the Income Date, a Certificate Owner may make a
Written Request for a partial surrender. Partial surrenders may only be
made if:
(i) the surrender request is at least $250;
(ii) the Surrender Value remaining in each Index Sub-Account
after the
partial surrender has been made is at least $1,000; and
(iii) the Combined Surrender Value remaining in the Certificate
after
the partial surrender has been made is at least $4,000.
If after complying with a request for a partial surrender there would be
insufficient value in the Certificate Owner Account to keep the Certificate
In Force, Keyport will treat the request as a request to surrender only the
excess amount over $4,000.
Notwithstanding the foregoing, Partial Surrenders are not allowed from the
Index Sub-Account(s) if the Certificate is issued under a Corporate or
Keogh Qualified Plan that is established pursuant to the provisions of
Section 301 of the Internal Revenue Code.
Surrender Procedures.
In the event the Certificate Owner does not specify from which Sub-
Account(s) the partial surrender is to be taken, it will be withdrawn from
Sub-Accounts in the following order: from the Interest Sub-Account; then
from any Index Sub-Account where the Indexed Value is available, starting
with the most recently established Index Sub-Account; then from any Index
Sub-Account where the Indexed Value currently is not available, starting
with the most recently established Index Sub-Account.
Keyport has established these default procedures with the goal of
minimizing the adverse impact on Certificate Owners, but does not represent
that the order of surrenders will necessarily be the most favorable
sequence for any individual Certificate Owner. Factors such as the length
of the Terms, timing of the partial surrender, the Guaranteed Interest Rate
Factors, and the Indexed Value of each Sub-Account need to be evaluated by
each Certificate Owner in determining the appropriate Sub-Account from
which to take a partial surrender.
Total Surrenders.
The Certificate Owner may make a Written Request for a total surrender.
Surrendering the Certificate will end it. The Surrender Value will be
determined as of the date Keyport receives the Written Request for
surrender. Keyport will pay the Certificate Owner, as applicable, the
Accumulated Value or Surrender Value of the Interest Sub-Account and the
Indexed Value or Surrender Value of the Index Sub-Account(s), less a
deduction for any premium taxes not previously paid. For any total
surrender made after the first Certificate Year, the Certificate Owner may
receive the values under an Annuity Option, rather than in a lump sum.
Keyport will, upon request, inform a Certificate Owner of the amount
payable upon a partial or total surrender. Any partial or total surrender
may be subject to tax and tax penalties. (See "Tax Considerations".)
Keyport may defer payment of any partial or total surrender for a period
not exceeding six (6) months from the date the Written Request for
surrender is received, or any shorter period permitted by state insurance
law. Only under highly unusual circumstances will a surrender payment be
deferred more than thirty (30) days. While all circumstances under which
deferral of surrender payment might be involved are not be foreseeable at
this time, such circumstances could include, for example, a period of
unusually high surrender requests, accompanied by a radical shift in
interest rates. If Keyport decides to defer payment for more than thirty
(30) days, the Certificate Owner will be notified in writing of that
decision.
6. Dollar Cost Averaging Programs
Keyport offers Dollar Cost Averaging Programs in which Certificate Owners
may participate by Written Request. The programs periodically transfer
values from the Interest Sub-Account to new Index Sub-Accounts of specific
Terms selected by the Certificate Owner. The programs allow a Certificate
Owner to allocate premium payments to Index Sub-Accounts over time rather
than having to invest in an Index Sub-Account all at once. The programs
are available for initial and subsequent Premium payments and for values
transferred into the Interest Sub-Account. Under the programs, Keyport
makes automatic transfers on a periodic basis out of the Interest Sub-
Account to establish one or more of the available Index Sub-Account Terms.
The Certificate Owner may not choose an Index Sub-Account with a Term that
would extend beyond the Income Date or the maximum date allowed following
the death of a Certificate Owner, Joint Owner, or Annuitant, if the Owner
is a non-natural person. Keyport reserves the right to limit the number of
Index Sub-Account Terms the Certificate Owner may choose but there are
currently no limits.
Under the programs, each transfer from the Interest Sub-Account will be to
a new Index Sub-Account of a Term selected by the Certificate Owner which
will have declared Guaranteed Interest Rate Factors unique to that Sub-
Account. As described in "Establishment of Guaranteed Interest Rate
Factors" these factors are established periodically by Keyport and will be
established prior to each transfer. Because the Dollar Cost Averaging
Programs are elected in advance of Keyport's declaration of the Guaranteed
Interest Rate Factors for Index Sub-Accounts established under the
programs, the Certificate Owner is advised to contact Keyport prior to any
transfer date to determine the Guaranteed Interest Rate Factors applicable
to the Certificate Owner's planned transfer. The Certificate Owner may
elect to terminate the programs at any time.
Keyport offers two Dollar Cost Averaging programs:
(i) Under the first program, the Certificate Owner by Written Request must
specify the amount (minimum $1,000) of each periodic transfer and the Index
Sub-Account Term(s) to which the transfers are to be made. Transfers will
be made until all values are transferred from the Interest Sub-Account.
When the value in the Interest Sub-Account reaches an amount that would
leave, after the current transfer, a remaining value that is less than the
periodic transfer amount, that remaining value is added to the current
transfer and allocated proportionally to the designated Index Sub-
Account(s) and the program will end, e.g., Certificate Owner has
designated $1,000 to a 3 year Term Index Sub-Account and $1,000 to a 5 year
Term Index Sub-Account and has $2,500 remaining in the Interest Sub-
Account. The final transfer will be for $1,250 to a 3 Year Term Index Sub-
Account and $1,250 to a 5 year Term Index Sub-Account.
(ii) Under the second program, the Certificate Owner by Written Request
must specify the amount (minimum $1,000) of each periodic transfer, the
duration for which the periodic transfers are to be made (e.g., 15 months)
and the Index Sub-Account Term(s) to which the transfers are to be made.
The first transfer will occur on a particular date designated in advance by
Keyport (the "designated date") as long as notice of the Certificate
Owner's Written Request is received no later than five (5) business days
prior to the designated date. Each subsequent transfer will occur
following the designated date, e.g., if the frequency is monthly and the
designated date is the 10th of a month and the notice is received on April
2, the first transfer will occur on April 10 and on the 10th of each
successive month.
Before any final transfer, the Certificate Owner may extend program (i) by
allocating Subsequent Premium to the Interest Sub-Account or by
transferring the Indexed Value of any Index Sub-Account at the end of its
Term to the Interest Sub-Account.
Partial Surrenders from the Interest Sub-Account are allowed while a
Dollar Cost Averaging Program is in effect. The duration of either program
may be shortened by such Partial Surrenders.
The Certificate Owner may, by Written Request or by telephone, change the
periodic amount to be transferred, change the Index Sub-Account(s) Terms to
which the transfers are to be made, or end the program. The program will
automatically end if the Income Date occurs. Keyport reserves the right to
end the program at any time by sending the Certificate Owner a notice one
month in advance.
Written or telephone instructions must be received by Keyport by the end
(currently 4:00 PM Eastern Time) of the business day preceding the next
scheduled transfer in order to be in effect for that transfer. Telephone
instructions are subject to the conditions and procedures established by
Keyport from time to time. The current conditions and procedures appear in
Appendix D, and Certificate Owners in a Dollar Cost Averaging Program will
be notified, in advance, of any changes.
7. Transfer of Values
The Certificate Owner may transfer account values between the Interest Sub-
Account and Index Sub-Accounts, subject to the following restrictions:
(a) all requests for transfers must be made before the Income
Date by telephone or by Written Request;
(b) the number of transfers may not exceed any limit Keyport may
set for a specified time period. Currently, Keyport does not
limit the number of permissible transfers in a single Certificate
Year;
(c) all or part of an Interest Sub-Account (but not less than
$1,000) may be transferred to establish a new Index Sub-Account
at any time before the Income Date;
(d) a transfer from an Index Sub-Account to an Interest Sub-
Account must include the entire Indexed Value of the Sub-Account
and may only be made at the end of a Term;
(e) the Term of a new Index Sub-Account cannot be longer than
the number of years remaining until the Income Date or the date
allowed following the death of a Certificate Owner, Joint
Certificate Owner or Annuitant, if the Owner is a non-natural
person.
While no charge currently applies to transfers, Keyport reserves the right
to charge $25 per transfer if a Certificate Owner makes more than 4
transfers in a single Certificate Year. This restriction will not apply to
Dollar Cost Averaging Programs. Keyport reserves the right, at any time
and without prior notice, to terminate, modify, or suspend the transfer
privileges described above.
8. Premium Taxes
Keyport deducts the amount of any premium taxes levied by any state or
governmental entity when the premium tax is incurred, unless Keyport elects
to defer such deduction until the time of surrender or the Income Date. It
is not possible to describe precisely the amount of premium tax payable on
any transaction involving a Certificate. Such premium taxes depend, among
other things, on the type of Certificate (Qualified or Non-Qualified), on
the state of residence of the Certificate Owner, the state of residence of
the Annuitant, the status of Keyport within such states, and the insurance
tax laws of such states. Currently such premium taxes range from 0% to
5.0%. For a schedule of such taxes, see Appendix C of this Prospectus.
9. Death Provisions
These provisions do not apply to Non-Allocated Certificates. In Non-
Allocated Certificates, Annuitants or payees are unknown until the
Certificate Owner requests that an annuity be effected.
(a) Non-Qualified Certificate
Death of a Certificate Owner, Joint Certificate Owner, or Certain Non-
Certificate Owner Annuitants. These provisions apply if, before the Income
Date while the Certificate is In Force, the Certificate Owner or any Joint
Certificate Owner dies (whether or not the decedent is also the Annuitant)
or the Annuitant dies under a Certificate with a non-natural Certificate
Owner such as a trust. The Designated Beneficiary will control the
Certificate Owner Account after such a death.
If the decedent was the Certificate Owner or the Annuitant (if the
Certificate Owner is not a natural person), the Designated Beneficiary may,
by the later of the 90th day after the death and the 60th day after Keyport
is notified of the death, surrender the Certificate Owner Account for the
death benefit on the date of surrender. The total death benefit is the sum
of the death benefit(s) of an Interest Sub-Account and each Index Sub-
Account(s). The death benefit of an Interest Sub-Account is equal to the
Accumulated Value of an Interest Sub-Account, i.e., (a) the portion of the
Initial Premium allocated to an Interest Sub-Account; plus (b) the portion
of any Subsequent Premium(s) allocated to the Interest Sub- Account; plus
(c) any amounts transferred to an Interest Sub-Account; less (d) any
partial surrender amounts from an Interest Sub-Account; less (e) any
amounts transferred from an Interest Sub-Account; plus (f) interest on the
net amount at the Declared Rate set on the first day of each calendar month
and guaranteed for that month.
The death benefit of each Index Sub-Account is the greater of the Death
Benefit and the Surrender Value. The Death Benefit is equal to (a) minus
(b), where (a) is the Indexed Value at the start of the Sub-Account Year in
which death occurs, with the applicable Index Increase recalculated as
described in Appendix B, and (b) is the sum of any partial surrenders since
the start of the Sub-Account Year. If the Floor is greater than zero, (a)
is "the Indexed Value as of the date of death, less any subsequent Partial
Surrender."
For a surrender after the applicable 90 or 60 day period and for a
surrender following the death of a Joint Certificate Owner, the Surrender
Value is payable instead.
If the decedent's surviving spouse (if any) is the sole Designated
Beneficiary, the surviving spouse will automatically become the new sole
Certificate Owner as of the decedent's date of death. If the decedent is
the Annuitant, the new Annuitant will be any living Contingent Annuitant
named in the application, otherwise the surviving spouse. The Certificate
Owner Account can stay in force until another death occurs (i.e., until the
death of the Annuitant, Certificate Owner, or Joint Certificate Owner).
Except for this paragraph, all of "Death Provisions" will apply to that
subsequent death.
In all other cases, the Certificate can stay In Force up to five (5) years
from the date of death. During this period, the Designated Beneficiary may
exercise all ownership rights, including the right to make transfers or
partial surrenders or the right to totally surrender the Certificate
pursuant to the surrender provisions of the Certificate. If the
Certificate is still In Force at the end of the five-year period, Keyport
will automatically end it by paying to the Designated Beneficiary the
Surrender Value. If the Designated Beneficiary is not alive then, Keyport
will pay any Person(s) previously named by the Designated Beneficiary in a
Written Request, otherwise the Designated Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Certificate
Owner or any Designated Beneficiary may, by Written Request, direct Keyport
to pay any benefit of $5,000 or more under an Annuity Option that meets the
following requirements: (a) the first payment to the Designated Beneficiary
must be made no later than one (1) year after the date of death; (b)
payments must be made over the life of the Designated Beneficiary or over a
period not extending beyond that person's life expectancy; and any Annuity
Option that provides for payments to continue after the death of the
Designated Beneficiary will not permit the successor payee to extend the
period of time over which the remaining payments are to be made. The
Certificate Owner may also direct that any benefit payable to a Designated
Beneficiary be paid under an Annuity Option meeting these same
requirements.
Death of Certain Non-Certificate Owner Annuitants. The following
provisions apply if, before the Income Date while the Certificate is In
Force, (a) the Annuitant dies, (b) the Annuitant is not a Certificate
Owner, and (c) the Certificate Owner is a natural person: The Certificate
will continue In Force after the Annuitant's death. The new Annuitant will
be any living Contingent Annuitant, otherwise the Certificate Owner.
(b) Qualified Certificates
Death of Annuitant. If the Annuitant dies while the Certificate is In
Force, the Designated Beneficiary will thereafter control the Certificate.
The Designated Beneficiary may by the later of the 90th day after the death
and the 60th day after Keyport is notified of the death, surrender the
Certificate Owner Account for the death benefit on the date of surrender,
calculated as described above. For a surrender after the applicable 90 or
60 day period, the Surrender Value is payable instead.
If the Certificate is not surrendered, the Certificate can stay In Force
for the time period permitted by the Internal Revenue Code provisions
applicable to the particular Qualified Plan. During this period, the
Designated Beneficiary may exercise all ownership rights, including the
right to make partial surrenders or the right to totally surrender the
Certificate pursuant to the surrender provisions of the Certificate. If
the Certificate is still In Force at the end of the period, Keyport will
automatically end it then by paying to the Designated Beneficiary the
Surrender Value. If the Designated Beneficiary is not alive then, Keyport
will pay any person(s) named by the Designated Beneficiary in a Written
Request, otherwise the Designated Beneficiary's estate.
Payment of Benefits. Instead of receiving a lump sum, the Certificate
Owner or any Designated Beneficiary may, by Written Request, direct Keyport
to pay any benefit of $5,000 or more under an Annuity Option that meets the
following requirements: (a) the first payment to the Designated
Beneficiary must be made no later than one (1) year after the date of
death; (b) payments must be made over the life of the Designated
Beneficiary or over a period not extending beyond that person's life
expectancy; and (c) any payment option that provides for payments to
continue after the death of the Designated Beneficiary will not permit the
successor payee to extend the period of time over which the remaining
payments are to be made. The Certificate Owner may also direct that any
benefit payable to a Designated Beneficiary be paid under an Annuity Option
meeting these same requirements.
D. ANNUITY PAYMENT PROVISIONS
1. Annuity Benefits
If the Annuitant is alive on the Income Date and the Certificate is In
Force, payments will begin under the payment option the Certificate Owner
has chosen. The amount of the payments will be determined by applying the
Income Value (less any premium taxes or other taxes not previously
deducted) on the Income Date in accordance with the option selected. The
total Income Value is the sum of the Accumulated Value for an Interest Sub-
Account and the Indexed Value of the Index Account(s).
2. The Income Date and Form of Annuity
The Income Date is shown on the Certificate Specifications page. If the
Annuitant dies before the Income Date and there is a successor Annuitant,
the Income Date will be based on the successor Annuitant's birthday if the
successor Annuitant is younger than the deceased Annuitant.
Under Allocated Certificates, a Certificate Owner may elect, at least
thirty (30) days prior to the Income Date, to have the Income Value applied
on the Income Date under any of the Annuity Options described below. In
the absence of such election, the Income Value will be applied on the
Income Date under Option 3 to provide a monthly life annuity with ten (10)
years of payments guaranteed.
If a Certificate is issued on a Non-Allocated basis, a Certificate Owner
may request that a portion of the Account Value, as modified by any
applicable Surrender Charge and Market Value Adjustment, be applied under
an Annuity Option for a participant in that Certificate Owner's plan.
Keyport will then issue a Certificate for such participant (who is also the
Annuitant) and begin annuity payments as directed by the Certificate Owner.
No surrenders may occur after the Income Date. Other special rules may
apply to qualified retirement plans. (See "Qualified Plans".)
3. Change of Annuity Option
The Certificate Owner may change the Annuity Option from time to time, but
the change must be made by Written Request and received by Keyport at least
thirty (30) days prior to the scheduled Income Date.
4. Annuity Options
In addition to the following options, other options may be arranged with
the mutual consent of the Certificate Owner and Keyport.
Option 1 - Income for a Fixed Number of Years. Keyport will pay an annuity
for a chosen number of years, not less than five (5) or more than thirty
(30). If, at the death of the payee, Option 1 payments have been made for
less than the chosen number of years:
(a) payments will be continued during the remainder of the period to the
successor payee; or
(b) the successor payee may elect to receive in a lump sum the present
value of the remaining payments, commuted at the rate of 3% per year or at
any greater interest rate used to create the annuity factor for this Option
1.
See "Annuity Payments" for the manner in which Option 1 may be taxed.
Option 2 - Life Income. Keyport will pay an annuity for as long as the
payee is alive. The amount of the annuity payments will depend on the age
of the payee at the time annuity payments are to begin and may also depend
on the payee's sex. IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE
ANNUITY PAYMENT IF THE PAYEE DIES AFTER THE RECEIPT OF THE FIRST PAYMENT OR
TO RECEIVE ONLY TWO ANNUITY PAYMENTS IF THE PAYEE DIES AFTER RECEIPT OF THE
SECOND PAYMENT AND SO ON.
Option 3 - Life Income with 5 or 10 Years Guaranteed. Keyport will pay an
annuity during the lifetime of the payee. If, at the death of the payee,
payments have been made for less than the selected number of years:
(a) payments will be continued during the remainder of the
period to the successor payee; or
(b) the successor payee may elect to receive in a lump sum the
present value of the remaining certain payments, commuted at the
rate of 3% per year or at any greater interest rate used to
create the annuity factor for this Option 3.
The amount of the annuity payments will depend on the age of the payee at
the time annuity payments are to begin and may also depend on the payee's
sex.
Option 4 - Joint and Last Survivor Income. Keyport will pay an annuity for
as long as either the payee or a designated second natural person is alive.
The amount of the annuity payments will depend on the age of both persons
at the time annuity payments are to begin and may also depend on each
person's sex. IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE ANNUITY
PAYMENT IF BOTH PAYEES DIE AFTER THE RECEIPT OF THE FIRST PAYMENT OR TO
RECEIVE ONLY TWO ANNUITY PAYMENTS IF BOTH PAYEES DIE AFTER RECEIPT OF THE
SECOND PAYMENT AND SO ON.
5. Frequency and Amount of Payments
Payments will normally be made in monthly installments. However, if the
net amount available to apply under any Annuity Option is less than $5,000,
Keyport has the right to pay the amount in one lump sum, in lieu of the
payment otherwise provided. In addition, if the payments would be or
become less than $100, Keyport has the right to change the frequency of
payments to such intervals as will result in payments of at least $100
each.
6. Proof of Age, Sex, and Survival of Annuitant
Keyport may require proof of age, sex, or survival of any payee upon whose
age, sex, or survival payments depend. If the age or sex has been
misstated, Keyport will compute the amount payable based on the correct age
and sex. If income payments have begun, any underpayment Keyport may have
made will be paid in full with the next annuity payment. Any overpayment,
unless repaid in one sum, will be deducted from future annuity payments
until Keyport is repaid in full.
INVESTMENTS BY KEYPORT
Assets of Keyport must be invested in accordance with the requirements
established by applicable state laws regarding the nature and quality of
investments that may be made by the general accounts and separate accounts
of life insurance companies and the percentage of their assets that may be
committed to any particular type of investment. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in Federal, state, and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate, and
certain other investments. (See D. GENERAL ACCOUNT INVESTMENTS for further
information on the investments of Keyport.)
All of Keyport's General Account assets will be available to fund a
Certificate Owner's claims under a Certificate.
In establishing the Guaranteed Interest Rates and Guaranteed Interest Rates
Factors under the Certificates, Keyport intends to take into account, among
other factors, the yields available on the instruments in which it will
invest the proceeds from the Certificates. (See "Interest Sub-Account",
and "Establishment of Guaranteed Interest Rate Factors".) Keyport's
obligations and the values and benefits under the Certificates, however, do
not vary as a direct function of the returns on the instruments in which
Keyport will have invested the proceeds from the Certificates.
Keyport's investment strategy with respect to the proceeds attributable to
Certificates generally will be to invest in debt securities which it will
use to match its liabilities with respect to the Terms of Index Sub-
Accounts to which the proceeds are allocated. This will be done, in
Keyport's sole discretion, by making investments which are authorized by
applicable state law. Keyport expects to invest a substantial portion of
the premiums received in securities issued by the United States Government,
its agencies, and instrumentalities, which may or may not be guaranteed by
the United States Government. This could include T-Bills, Notes, Bonds,
Zero Coupon Securities, and Mortgage Pass-Through Certificates, including
Government National Mortgage Association backed securities (GNMA
Certificates), Federal National Mortgage Association Guaranteed
Pass-Through Certificates (FNMA Certificates), Federal Home Loan Mortgage
Corporation Mortgage Participation Certificates (FHLMC Certificates), and
others.
In addition, Keyport may invest its assets in various instruments,
including equity options, futures, forwards, and other instruments based on
the S&P Index in order to hedge Keyport's obligations with respect to Index
Sub-Accounts. Keyport may also buy and sell interest rate swaps and caps,
Treasury bond futures, and other instruments to hedge its exposure to
changes in interest rates. These derivative instruments will be purchased
from counterparties which conform to Keyport's Policies and Guidelines
regarding derivative instruments. Investments in these instruments
generally involve the following types of risks: in the case of over-the-
counter options and forward contracts, there is no guarantee that markets
will exist for these investments when Keyport wants to close out a
position; futures exchanges may impose trading limits which may inhibit
Keyport's ability to close out positions in exchange-listed instruments;
and if Keyport has an open position with a dealer that becomes insolvent,
Keyport may experience a loss.
While the foregoing generally describes Keyport's investment strategy with
respect to the proceeds attributable to the Certificates, Keyport is not
obligated to invest assets, including the proceeds attributable to the
Certificates, according to any particular strategy, except as may be
required by Rhode Island and other state insurance laws.
AMENDMENT OF CERTIFICATE
Keyport reserves the right to amend the Certificate to meet the
requirements of any applicable Federal or state laws or regulations.
Keyport will notify Certificate Owners in writing of any such amendments.
ASSIGNMENT OF CERTIFICATE
A Certificate Owner may assign a Certificate at any time, as permitted by
applicable law. A copy of any assignment must be filed with Keyport. An
assignment will not be binding upon Keyport until it receives a written
copy. The Certificate Owner's rights and those of any revocably-named
person will be subject to the assignment.
Any Qualified Certificate may have limitations on assignability. Keyport
assumes no responsibility for the validity or effect of any assignment.
Because an assignment may be a taxable event, a Certificate Owner should
consult a competent tax adviser as to the tax consequences of any
assignment.
DISTRIBUTION OF CERTIFICATE
Keyport Financial Services Corp. ("KFSC") serves as the Principal
Underwriter for the Certificate described in this Prospectus. The
Certificate will be sold by salespersons who represent Keyport Life
Insurance Company (KFSC's corporate parent) as insurance agents and who are
registered representatives of broker-dealers who have entered into
distribution agreements with KFSC. KFSC is a wholly-owned subsidiary of
Keyport and is registered with the Securities and Exchange Commission
("SEC") under the Securities Exchange Act of 1934 ("Exchange Act") as a
broker-dealer. KFSC is a member of the National Association of Securities
Dealers, Inc. ("NASD"). It is located at 125 High Street, Boston,
Massachusetts 02110.
Keyport will pay a maximum commission to broker-dealers of 5.25% of any
premium paid under a Certificate and may pay a reduced commission.
Certificates may be sold with a lower commission structure (1) to a person
who is an officer, director or employee of Keyport or of certain affiliates
of Keyport or (2) to any Qualified Plan established for such a person. Such
Certificates will have higher Participation Rates under the Index Sub-
Account(s), reflecting anticipated cost savings to Keyport from the lower
commission structure..
TAX CONSIDERATIONS
A. GENERAL
SINCE THE LAW IS COMPLICATED AND SINCE TAX CONSEQUENCES WILL VARY ACCORDING
TO THE ACTUAL STATUS OF THE CERTIFICATE OWNER, LEGAL AND TAX ADVICE MAY BE
NEEDED BY A PERSON, EMPLOYER, OR OTHER ENTITY CONTEMPLATING THE PURCHASE OF
A CERTIFICATE DESCRIBED IN THIS PROSPECTUS.
It should be understood that any detailed description of the tax
consequences regarding the purchase of a Certificate cannot be made in this
Prospectus and that special tax rules may be applicable with respect to
certain purchase situations not discussed herein. In addition, no attempt
is made to consider any applicable state or other tax laws. For detailed
information, a competent tax advisor should always be consulted.
This discussion is based upon Keyport's understanding of Federal income tax
laws as they are currently interpreted. The United States Congress has in
the past and may in the future consider legislation that, if enacted, could
adversely affect the tax treatment of annuity Certificates, including
distributions and undistributed appreciation. There is no way of
predicting whether, when, or in what form Congress will enact legislation
affecting annuity contracts. Any such legislation could have retroactive
effect regardless of the date of enactment. No representation is made
regarding the likelihood of continuation of those current Federal income
tax laws or of the current interpretations by the Internal Revenue Service.
B. TAXATION OF KEYPORT
Keyport is taxed as a life insurance company under Part I of Subchapter L
of the Internal Revenue Code ("Code"). The assets underlying the
Certificates will be owned by Keyport. Any income earned on those assets
will be Keyport's income.
C. TAXATION OF ANNUITIES IN GENERAL
1. General
Section 72 of the Code governs the taxation of annuities in general. A
Certificate Owner (including a trust or other entity owning a Non-Qualified
Certificate as an agent for an individual) is not taxed on increases in
Certificate Owner Account Value until a distribution occurs, either in the
form of a lump sum payment (e.g., a full or partial surrender of the
Certificate Owner Account Value), an assignment, a gift of the Certificate,
or as annuity payments. The provisions of Section 72 of the Code
concerning distributions are briefly summarized below. A trust or other
entity owning a Non-Qualified Certificate other than as an agent for an
individual is taxed differently; increases in Sub-Account Value are taxed
yearly whether or not a distribution occurs.
2. Surrender, Assignments, and Gifts
A Certificate Owner who fully surrenders the Certificate is taxed on the
portion of the payment that exceeds the Certificate Owner's cost basis in
the Certificate. For Non-Qualified Certificates, the cost basis is
generally the amount of the Initial Premium and any Subsequent Premium(s),
and the taxable portion of the surrender payment is taxed as ordinary
income. For Qualified Certificates, the cost basis is generally zero, and
the taxable portion of the surrender payment is generally taxed as ordinary
income subject to special 5-year income averaging for lump-sum
distributions received before January 1, 2000. A Designated Beneficiary
receiving a lump sum surrender benefit after the death of the Annuitant or
Certificate Owner is taxed on the portion of the amount that exceeds the
Certificate Owner's cost basis in the Certificate. If the Designated
Beneficiary elects to receive annuity payments within sixty (60) days of
the decedent's death, different tax rules apply. See "Annuity Payments"
below.
Partial surrenders received under Non-Qualified Certificates prior to the
Income Date are first included in gross income to the extent that
Certificate Owner Account Value exceeds the Initial Premium and any
Subsequent Premium. Then, to the extent Certificate Owner Account Value
does not exceed the Initial Premium and any Subsequent Premium, such
surrenders are treated as a non-taxable return of principal to the
Certificate Owner. For partial surrenders under a Qualified Certificate,
payments are treated first as a non-taxable return of principal up to the
cost basis and then a taxable return of income. Since the cost basis of
Qualified Certificates is generally zero, partial surrender amounts will
generally be fully taxed as ordinary income.
A Certificate Owner who assigns or pledges a Non-Qualified Certificate is
treated as having received the amount assigned or pledged and thus is
subject to taxation under the rules applicable to surrenders. A
Certificate Owner who gives away the Certificate (i.e., transfers it
without full and adequate consideration) to anyone other than his or her
spouse is treated for income tax purposes as if he or she had fully
surrendered the Certificate.
A special computational rule applies if Keyport issues to the Certificate
Owner, during any calendar year, (a) two or more Certificates or (b) one or
more Certificates and one or more of Keyport's other annuity contracts.
Under this rule, the amount of any distribution includable in the
Certificate Owner's gross income is to be determined under Section 72(e) of
the Code by treating all the Keyport contracts and Certificates as one.
Keyport believes that this means the amount of any distribution under one
Certificate will be includable in gross income to the extent that, at the
time of distribution, the sum of the values for all the Certificates or
Certificates exceeds the sum of the cost bases for all the Certificates.
3. Annuity Payments
The non-taxable portion of each annuity payment is determined by an
"exclusion ratio" formula which establishes the ratio that the cost basis
of the Certificate bears to the total expected value of annuity payments
for the term of the annuity. The remaining portion of each payment is
taxable. Such taxable portion is taxed at ordinary income rates.
For Qualified Certificates, the cost basis is generally zero. With annuity
payments based on life contingencies, the payments will become fully
taxable once the payee lives longer than the life expectancy used to
calculate the non-taxable portion of the prior payments.
4. Penalty Tax
Payments received by Certificate Owners, Annuitants, and Designated
Beneficiaries under Certificates may be subject to both ordinary income
taxes and a penalty tax equal to ten percent (10%) of the amount received
that is includable in income. The penalty tax is not imposed on amounts
received: (a) after the taxpayer attains age 59-1/2; (b) in a series of
substantially equal payments made for life or life expectancy; (c) after
the death of the Certificate Owner (or, where the Certificate Owner is not
a human being, after the death of the Annuitant); (d) if the taxpayer
becomes totally and permanently disabled; or (e) under a Non-Qualified
Certificate's annuity payment option that provides for a series of
substantially equal payments, provided the Certificate is not issued as a
result of a Section 1035 exchange and the first annuity payment begins in
the first Certificate Year.
5. Income Tax Withholding
Keyport is required to withhold Federal income taxes on taxable amounts
paid under Certificates unless the recipient elects not to have withholding
apply. Keyport will notify recipients of their right to elect not to have
withholding apply. See "Tax-Sheltered Annuities" ("TSAs") for an
alternative type of withholding that may apply to distributions from TSAs
that are eligible for rollover to another TSA or to an individual
retirement annuity or account ("IRA").
6. Section 1035 Exchanges
A Non-Qualified Certificate may be purchased with proceeds from the
surrender of an existing annuity Certificate. Such a transaction may
qualify as a tax-free exchange pursuant to Section 1035 of the Code. It is
Keyport's understanding that in such an event: (a) the new Certificate will
be subject to the distribution-at-death rules described in "Death
Provisions for Non-Qualified Certificates"; (b) premium payments made
between August 14, 1982 and January 18, 1985, and the income allocable to
them will, following an exchange, no longer be covered by a "grandfathered"
exception to the penalty tax for a distribution of income that is allocable
to an investment made over ten (10) years prior to the distribution; and
(c) premium payments made before August 14, 1982, and the income allocable
to them will, following an exchange, continue to receive the following
"grandfathered" tax treatment under prior law: (i) the penalty tax does not
apply to any distribution; (ii) partial surrenders are treated first as a
non-taxable return of principal and then a taxable return of income; and
(iii) assignments are not treated as surrenders subject to taxation.
Keyport's understanding of the above is principally based on legislative
reports prepared by the Staff of the Congressional Joint Committee on
Taxation.
D. QUALIFIED PLANS
The Certificate is designed for use with several types of Qualified Plans.
The tax rules applicable to participants in such Qualified Plans vary
according to the type of Plan and the terms and conditions of the Plan
itself. Therefore, no attempt is made herein to provide more than general
information about the use of the Certificate with the various types of
Qualified Plans.
Participants under such Qualified Plans as well as Certificate Owners,
Annuitants, and Designated Beneficiaries are cautioned that the rights of
any person to any benefits under such Qualified Plans may be subject to the
terms and conditions of the Plans themselves regardless of the terms and
conditions of the Certificate issued in connection therewith. Following
are brief descriptions of the various types of Qualified Plans and of the
use of the Certificate in connection therewith. Purchasers of the
Certificate should seek competent advice concerning the terms and
conditions of the particular Qualified Plan and use of the Certificate with
that Plan.
1. Tax-Sheltered Annuities
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational, and scientific organizations
specified in Section 501c(3) of the Code to purchase annuity Certificates
and, subject to certain contribution limitations, exclude the amount of
premium payments from gross income for tax purposes. However, such premium
payments may be subject to Social Security ("FICA") taxes. This type of
annuity Certificate is commonly referred to as a "Tax-Sheltered Annuity".
Section 403(b)(11) of the Code contains distribution restrictions.
Specifically, benefits may be paid, through surrender of the Certificate or
otherwise, only (a) when the employee attains age 59-1/2, separates from
service, dies, or becomes totally and permanently disabled (within the
meaning of Section 72(m)(7) of the Code) or (b) in the case of hardship. A
hardship distribution must be of employee contributions only and not of any
income attributable to those contributions. Section 403(b)(11) does not
apply to distributions attributable to assets held as of December 31, 1988.
Thus, it appears that the law's restrictions would apply only to
distributions attributable to contributions made after 1988, to earnings on
those contributions, and to earnings on amounts held as of December 31,
1988.
The Internal Revenue Service has indicated that the distribution
restrictions of Section 403(b)(11) are not applicable when TSA funds are
being transferred tax-free directly to another TSA issuer, provided the
transferred funds continue to be subject to the Section 403(b)(11)
distribution restrictions.
Keyport will notify a Certificate Owner who has requested a distribution
from a Certificate if all or part of the distribution is eligible for
rollover to another TSA or to an IRA. Any amount eligible for rollover
treatment will be subject to mandatory Federal income tax withholding at a
twenty percent (20%) rate if the Certificate Owner receives the amount
rather than directing Keyport by Written Request to transfer the amount as
a direct rollover to another TSA or IRA.
2. Individual Retirement Annuities
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity."
These Individual Retirement Annuities are subject to limitations on the
amount which may be contributed, the persons who may be eligible, and on
the time when distributions may commence. In addition, distributions from
certain types of Qualified Plans may be placed on a tax-deferred basis into
an Individual Retirement Annuity.
3. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of retirement plans for employees. Such retirement
plans may permit the purchase of the Certificate to provide benefits under
the plans.
THE COMPANY
A. Business
General
Keyport Life Insurance Company ("Keyport") is a specialty insurance company
providing a diversified line of fixed, indexed and variable annuity
products designed to serve the growing retirement savings market. These
annuity products are sold through a wide ranging network of banks, agents
and securities dealers. Keyport seeks to (i) maintain its presence in the
fixed annuity market while expanding its sales of variable and equity-
indexed annuities, (ii) achieve a broader market presence through the use
of diversified distribution channels and (iii) maintain a conservative
approach to investment and liability management.
Keyport is licensed to do business in all states except New York and is
also licensed in the District of Columbia and the Virgin Islands. Keyport
has been rated A+ (Superior) by A.M. Best and Company ("A.M. Best"),
independent analysts of the insurance industry. Keyport has been rated A+
each year since 1976, the first year Keyport was subject to A.M. Best's
alphabetic rating system. Standard & Poor's ("S&P") has rated Keyport AA
for excellent financial security, Moody's Investor Services ("Moody's") has
rated Keyport A1 for good financial strength and Duff & Phelps has rated
Keyport AA- for very high claims paying ability. The A.M. Best's A+ rating
is in the highest rating category, which also includes A++. S&P and Duff &
Phelps have one rating category above AA and Moody's has two rating
categories above A. Within the S&P AA category, only AA+ is higher. The
Moody's "1" modifier signifies that Keyport is at the higher end of the A
category while the Duff & Phelps "-" modifier signifies that Keyport is at
the lower end of the AA category. These ratings merely reflect the opinion
of the rating company as to the relative financial strength of Keyport and
Keyport's ability to meet its contractual obligations to its policyholders.
Keyport's wholly owned insurance subsidiaries are Independence Life and
Annuity Company ("Independence Life") and American Benefit Life Insurance
Company, to be renamed Keyport Benefit Life Insurance Company ("Keyport
Benefit"), on or about April 1, 1998. Other wholly owned subsidiaries are
Liberty Advisory Services Corp., an investment advisory company, and
Keyport Financial Services Corp., a broker-dealer.
Keyport is an indirect wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial") which is a publicly traded holding
company. Liberty Financial is an indirect majority owned subsidiary of
Liberty Mutual Insurance Company ("Liberty"), a multi-line insurance
company.
Liberty Financial is an asset accumulation and management company providing
investment management and retirement-oriented insurance products through
multiple distribution channels. Keyport issues and underwrites
substantially all of Liberty Financial's retirement-oriented insurance
products. Liberty Financial's investment advisor, asset management and
bank distribution operating units are The Colonial Group, Inc.
("Colonial"), Stein Roe & Farnham Incorporated ("Stein Roe"), Newport
Pacific Management, Inc. ("Newport") and Independent Holdings, Inc.
("Independent"). Colonial, Stein Roe and Newport manage certain underlying
mutual funds and other invested assets of Keyport's separate accounts.
Stein Roe also provides asset management services for a substantial portion
of Keyport's general account. Independent, through its subsidiary, markets
Keyport's products through the bank distribution channel.
Keyport's executive and administrative offices are located at 125 High
Street, Boston Massachusetts 02110, and its home office is at 695 George
Washington Highway, Lincoln, Rhode Island 02865.
B. Selected Financial Data
The following selected consolidated financial data for Keyport should be
read in conjunction with the consolidated financial statements and notes
thereto included elsewhere in this prospectus.
Selected Financial Data (in thousands)
As of and for
the year ended
December 31 1997 1996 1995 1994 1993
Income statement
data:
Investment
income $ 847,048 $ 790,365 $ 755,930 $ 689,575 $ 669,667
Interest
credited (594,084) (572,719) (555,725) (481,926) (504,205)
Investment
spread 252,964 217,646 200,205 207,649 165,462
Fee income 36,353 33,534 29,767 25,273 18,158
Operating
expenses (49,941) (43,815) (44,475) (54,295) (40,697)
Income before
income taxes 172,651 137,846 107,941 95,276 86,705
Net income 113,561 90,624 69,610 63,225 57,995
Balance sheet
data:
Total cash and
investments $13,505,858 $12,305,312 $10,922,125 $ 9,274,793 $8,912,526
Total assets 15,342,189 13,924,557 12,280,194 10,873,604 10,227,327
Stockholder's
equity 1,103,021 980,782 902,331 682,485 684,270
C. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Net income was $113.6 million in 1997 compared to $90.6 million in 1996 and
$69.6 million in 1995. The improvement of $23.0 million in 1997 compared to
1996 resulted from higher investment spread, higher fee income and higher
net realized investment gains. Partially offsetting these items were
increased amortization of deferred policy acquisition costs and value of
insurance in force, higher operating expenses and higher income tax
expense.
Investment spread is the amount by which investment income earned on the
Company's investments exceeds interest credited to policyholder balances.
Investment spread was $253.0 million in 1997 compared to $217.6 million in
1996 and $200.2 million in 1995. The amount by which the average yield on
investments exceeds the average interest credited rate on policyholder
balances is the investment spread percentage. Such investment spread
percentage was 1.91% in 1997, and 1.84% in 1996 and 1995.
Investment income was $847.0 million in 1997 compared to $790.4 million in
1996 and $755.9 million in 1995. The increase of $56.6 million in 1997
compared to 1996 primarily relates to an $85.6 million increase as a result
of a higher level of average invested assets, partially offset by a
$29.0 million decrease resulting from a lower average investment yield. The
1997 investment income was net of $47.6 million of S&P 500 Index call
option amortization expense related to the Company's equity-indexed
annuities compared to $14.0 million in 1996. The average investment yield
was 6.90% in 1997 compared to 7.16% in 1996. Investment income increased
in 1996 compared to 1995 primarily as a result of a higher level of average
invested assets, partially offset by a decrease in the average investment
yield. The average investment yield was 7.16% in 1996 compared to 7.51% in
1995.
Interest credited to policyholders totaled $594.1 million in 1997 compared
to $572.7 million in 1996 and $555.7 million in 1995. The increase of
$21.4 million in 1997 compared to 1996 primarily relates to a $56.4 million
increase as a result of a higher level of average policyholder balances,
partially offset by a $35.0 million decrease resulting from a lower average
interest credited rate. Policyholder balances averaged $11.9 billion
(including $10.8 billion of fixed products and $1.1 billion of equity-
indexed annuities) in 1997 compared to $10.8 billion (including $10.4
billion of fixed products and $0.4 billion of equity-indexed annuities) in
1996. The average interest credited rate was 4.99% (5.45% on fixed
products and 0.85% on equity-indexed annuities) in 1997 compared to 5.32%
(5.50% on fixed products and 0.85% on equity-indexed annuities) in 1996.
The Company's equity-indexed annuities credit interest to the policyholder
at a "participation rate" equal to a portion (ranging for existing policies
from 60% to 95%) of the change in value of the S&P 500 Index. The
Company's equity-indexed annuities also provide a full guarantee of
principal if held to term, plus interest at 0.85% annually. For each of
the periods presented, the interest credited to equity-indexed
policyholders related to the participation rate was offset by investment
income recognized on the S&P 500 Index call options, resulting in an 0.85%
net credited rate. Interest credited to policyholders increased in 1996
compared to 1995 primarily as a result of a higher level of average
policyholder balances, partially offset by a decrease in the average
interest credited rate. Policyholder balances averaged $10.8 billion in
1996 compared to $9.8 billion in 1995. The average interest credited rate
was 5.67% in 1995.
Average investments (computed without giving effect to Statement of
Financial Accounting Standards No. 115), including a portion of the
Company's cash and cash equivalents, were $12.3 billion in 1997 compared to
$11.0 billion in 1996 and $10.1 billion in 1995. The increase of $1.3
billion in 1997 compared to 1996 was primarily due to a 100% coinsurance
agreement with respect to a $954.0 million block of SPDAs entered into with
Fidelity & Guaranty Life Insurance Company ("F&G Life") during the third
quarter of 1996 and investment portfolio earnings. The increase of $0.9
billion in 1996 compared to 1995 was primarily due to the reinvestment of
portfolio earnings and the F&G Life transaction.
Net realized investment gains were $24.7 million in 1997 compared to $5.5
million in 1996 and net realized investment losses of $4.0 million in 1995.
Sales of fixed maturity investments generally are made to maximize total
return. The net realized investment gains in 1997 included gains on the
sales of fixed maturity investments of $16.8 million and gains on
redemption of seed money investments in separate account mutual funds
sponsored by the Company of $7.9 million. The net realized investment
gains in 1996 were primarily attributable to sales of fixed maturity
investments and sales of investments received in the F&G Life transaction.
Surrender charges on fixed and variable annuity withdrawals generally are
assessed at declining rates applied to policyholder withdrawals during the
first five to seven years of the contract. Total surrender charges were
$16.0 million in 1997 compared to $14.9 million in 1996 and $14.8 million
in 1995.
Total annuity withdrawals represented 11.6% of the total average annuity
policyholder and separate account balances in 1997 and 1996 and 9.9% in
1995. Excluding surrenders from the older block of annuities acquired in
the F&G Life transaction, the withdrawal percentages were 10.6% and 10.0%
in 1997 and 1996, respectively.
Separate account fees are primarily mortality and expense charges earned on
variable annuity and variable life policyholder balances. These fees, which
are based on the market values of the assets in separate accounts
supporting the contracts, were $17.1 million in 1997 compared to $16.0
million in 1996 and $13.2 million in 1995. Such fees represented 1.54%,
1.68% and 1.61% of average variable annuity and variable life separate
account balances in 1997, 1996 and 1995, respectively.
Management fees are primarily investment advisory fees related to the
separate account assets. The fees are based on the levels of assets under
management, which are affected by product sales and redemptions and changes
in the market values of the investments managed. Management fees were $3.3
million in 1997 compared to $2.6 million in 1996 and $1.8 million in 1995.
The increase of $0.7 million in 1997 compared to 1996 primarily reflects a
higher level of average assets under management.
Operating expenses primarily represent compensation, selling and other
general and administrative expenses. These expenses were $49.9 million in
1997 compared to $43.8 million in 1996 and $44.5 million in 1995. The
increase in 1997 compared to 1996 was primarily due to higher employee
related expenses and selling expenses. The decrease in 1996 compared to
1995 was primarily due to IRS interest penalties of $1.9 million recorded
in 1995 related to a federal income tax assessment.
Amortization of deferred policy acquisition costs was $75.9 million in 1997
compared to $60.2 million in 1996 and $58.5 million in 1995. These
increases in amortization in 1997 and 1996 were primarily related to the
increase in investment spread from the growth of business in force
associated with fixed and equity-indexed products and the increased sales
of variable annuity products. Amortization expense represented 29.2%,
27.7% and 29.2%, of investment spread for 1997, 1996 and 1995,
respectively.
Amortization of value of insurance in force totaled $10.5 million in 1997
compared to $10.2 million in 1996 and $9.5 million in 1995. The increase in
amortization in 1997 compared to 1996 was primarily due to increased
amortization of $4.0 million related to the F&G Life transaction, partially
offset by decreased amortization related to a change in mortality
assumptions. The increase in amortization in 1996 compared to 1995 was
primarily due to $2.7 million of amortization recorded in 1996 relating to
the F&G Life transaction, partially offset by lower amortization in 1996
due to an increase in estimated amortization periods in the last quarter of
1995 of the Company's closed block of single premium whole life insurance.
Federal income tax expense was $59.1 million or 34.2% of pretax income in
1997 compared to $47.2 million, or 34.3% pretax income in 1996, and $38.3
million, or 35.5% of pretax income in 1995.
Effective July 18, 1997, due to a decrease in the ownership percentage of
the Company's indirect parent, the Company is no longer included in the
consolidated federal income tax return of Liberty. The Company does not
expect this change to have a material effect on its financial condition or
its results from operations. The Company will be required to file a
separate federal income tax return until the Company is eligible to file a
consolidated federal income tax return with Liberty Financial in 2002.
2. Financial Condition
Stockholder's Equity as of December 31, 1997 was $1.1 billion compared to
$980.8 million as of December 31, 1996. The increase in stockholder's
equity was due to net income of $113.6 million, as well as an increase in
after-tax unrealized gains and losses (net of adjustments to deferred
policy acquisition costs and value of insurance in force) during the period
of $8.7 million.
Investments not including cash and cash equivalents totaled $12.3 billion
at December 31, 1997 compared to $11.5 billion at December 31, 1996. The
increase of $0.8 billion is primarily attributable to the reinvestment of
portfolio earnings in 1997.
The Company's general investment policy is to hold fixed maturity assets
for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and
appropriate tax planning, the Company classifies its entire fixed maturity
portfolio as "available for sale" and accordingly carries such investments
at fair value. The Company's total investments at December 31, 1997 and
1996 reflected net unrealized gains of $280.3 million and $229.8 million,
respectively, relating to its fixed maturity and equity portfolios.
Approximately $11.0 billion, or 81.7%, of the Company's general account
investments at December 31, 1997, was rated by Standard & Poor's
Corporation, Moody's Investors Service or under comparable statutory rating
guidelines established by the NAIC. At December 31, 1997, the carrying
value of investments in below investment grade securities totaled $1.1
billion, or 7.9% of general account investments of $13.5 billion. Below
investment grade securities generally provide higher yields and involve
greater risks than investment grade securities because their issuers
typically are more highly leveraged and more vulnerable to adverse economic
conditions than investment grade issuers. In addition, the trading market
for these securities may be more limited than for investment grade
securities.
3. Management of the Company's Investments
Asset-liability duration management is utilized by the Company to minimize
the risks of interest rate fluctuations and policyholder withdrawals. The
Company believes that its fixed and equity-indexed policyholder balances
should be backed by investments, principally comprised of fixed maturities,
that generate predictable rates of return. The Company does not have a
specific target rate of return. Instead, its rates of return vary over time
depending on the current interest rates, the slope of the yield curve and
the excess at which fixed maturities are priced over the yield curve. Its
portfolio strategy is designed to achieve acceptable risk-adjusted returns
by effectively managing portfolio liquidity and credit quality.
The Company conducts its investment operations to closely match the
duration of the assets in its investment portfolio to its policyholder
balances. The Company seeks to achieve an acceptable spread between what it
earns on its assets and interest credited on its policyholder balances by
investing principally in fixed maturities. The Company's fixed-rate
products incorporate surrender charges to encourage persistency and make
the cost of its policyholder balances more predictable. Approximately 83.0%
of the Company's fixed annuity policyholder balances were subject to
surrender charges at December 31, 1997.
As part of its asset-liability management discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based
on the results of these computer simulations, the investment portfolio has
been constructed with a view toward maintaining a desired investment spread
between the yield on portfolio assets and the interest credited on its
policyholder balances under a variety of possible future interest rate
scenarios. At December 31, 1997 the effective duration of the Company's
fixed maturities investments (including certain cash and cash equivalents)
was approximately 2.9. Effective duration is a common measure for the
price sensitivity of a fixed-income portfolio to changes in interest rates.
It measures the approximate percentage change in the market value of a
portfolio when interest rates change by 100 basis points. This measure
includes the impact of estimated changes in portfolio cash flows from
features, such as prepayments and bond calls.
As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate swap agreements and
interest rate cap agreements to match assets more closely to liabilities.
Swap agreements are agreements to exchange with counterparty interest rate
payments of differing character (e.g., fixed-rate payments exchanged for
variable-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company currently
utilizes swap agreements to reduce asset duration and to better match
interest earned on longer-term fixed-rate assets with interest credited to
policyholders. The Company had 45 outstanding swap agreements with an
aggregate notional principal amount of $2.6 billion and had 39 outstanding
swap agreements with an aggregate notional principal amount of $2.3 billion
as of December 31, 1997 and 1996, respectively.
Cap agreements are agreements with a counterparty which require the payment
of a premium for the right to receive payments for the difference between
the cap interest rate and a market interest rate on specified future dates
based on an underlying principal balance (notional principal) to hedge
against rising interest rates. The Company had interest rate cap agreements
with an aggregate notional amount of $250.0 million and $450.0 million as
of December 31, 1997 and 1996, respectively.
With respect to the Company's equity-indexed annuities, the Company buys
call options on the S&P 500 Index to hedge its obligations to provide
returns based upon this index. The Company had call options with a book
value of $323.3 million and $109.7 million as of December 31, 1997 and
1996, respectively.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is counterparty nonperformance. The Company
believes that the counterparties to its swap and call option agreements are
financially responsible and that the counterparty risk associated with
these transactions is minimal. In addition, swap agreements have interest
rate risk and call options have stock market risk. However, the swap
agreements hedge fixed-rate assets; the Company expects that any interest
rate movements that adversely affect the market value of swap agreements
would be offset by changes in the market values of such fixed rate assets.
Similarly, the call options hedge the Company's obligations to provide
returns on equity-indexed annuities based upon the S&P 500 Index, and the
Company believes that any stock market movements that adversely affect the
market value of S&P 500 call options would be substantially offset by a
reduction in policyholder liabilities. However, there can be no assurance
that these hedges will be effective in offsetting the potentially adverse
effects of changes in S&P 500 Index levels. The Company's profitability
could be adversely affected if the value of its S&P 500 call options
increase less than (or decrease more than) the value of the guarantees made
to equity-indexed policyholders.
The Company routinely reviews its portfolio of investment securities. The
Company identifies monthly any investments that require additional
monitoring, and carefully reviews the carrying value of such investments at
least quarterly to determine whether specific investments should be placed
on a nonaccrual basis and to determine declines in value that may be other
than temporary. There were no non-income producing investments in the
Company's fixed maturity portfolio at December 31, 1997. In making these
reviews, the Company principally considers the adequacy of collateral (if
any), compliance with contractual covenants, the borrower's recent
financial performance, news reports and other externally generated
information concerning the creditor's affairs. In the case of publicly
traded fixed maturity investments, management also considers market value
quotations, if available.
4. Liquidity
The Company's liquidity needs and financial resources pertain to the
management of the general account assets and policyholder balances. The
Company uses cash for the payment of annuity and life insurance benefits,
operating expenses and policy acquisition costs, and the purchase of
investments. The Company generates cash from annuity premiums and deposits,
net investment income, and from maturities and sales of its investments.
Annuity premiums, maturing investments and net investment income have
historically been sufficient to meet the Company's cash requirements. The
Company monitors cash and cash equivalents in an effort to maintain
sufficient liquidity and has strategies in place to maintain sufficient
liquidity in changing interest rate environments. Consistent with the
nature of its obligations, the Company has invested a substantial amount of
its general account assets in readily marketable securities. At December
31, 1997, $10.3 billion, or 76.2%, of the Company's general account
investments are considered readily marketable.
To the extent that unanticipated surrenders cause the Company to sell for
liquidity purposes a material amount of securities prior to their maturity,
such surrenders could have a material adverse effect on the Company.
Although no assurance can be given, the Company believes that liquidity to
fund withdrawals would be available through incoming cash flow, the sale of
short-term or floating-rate instruments, thereby precluding the sale of
fixed maturity investments in a potentially unfavorable market.
Current Rhode Island insurance law permits the payment of dividends or
distributions from the Company to Liberty Financial, which, together with
dividends and distributions paid during the preceding 12 months, do not
exceed the lesser of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) the net gain from operations for the preceding fiscal
year. Any proposed dividend in excess of this amount is called an
"extraordinary dividend" and may not be paid until it is approved by the
Commissioner of Insurance of the State of Rhode Island. As of December 31,
1997, the amount of dividends that the Company could pay without such
approval was $70.3 million.
Based upon the historical cash flow of the Company, the Company's current
financial condition and the Company's expectation that there will not be a
material adverse change in the results of operations of the Company and its
subsidiaries during the next twelve months, the Company believes that cash
flow provided by operating activities over this period will provide
sufficient liquidity for the Company to meet its liquidity needs.
5. Year 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. This potential problem has become known as
the "Year 2000 issue". The Year 2000 issue affects virtually all companies
and organizations.
Computer applications which are affected by the Year 2000 issue could
impact Keyport's business functions in various ways, ranging from a
complete inability to perform critical business functions to a loss of
productivity in varying degrees. Likewise, the failure of some computer
applications could have no impact on critical business functions.
Keyport is assessing and addressing the Year 2000 issue by implementing a
four-step plan. The first two steps involve inventorying all the computer
applications which support Keyport's business functions and prioritizing
computer applications which are affected by the Year 2000 issue based upon
the degree of impact each has on the functioning of Keyport's business
units. The first two steps of the plan are substantially complete.
The final two steps of the four-step plan involve remediation of affected
computer applications (i.e., repairing or replacing programs, including
those which interface with third-party computer applications that have
unremediated Year 2000 issues, and appropriate testing) and reinstallation
of computer applications. For computer applications which are "mission
critical" (i.e., their failure would result in the complete inability to
perform critical business functions), Keyport expects to complete the final
two steps of the plan by December 31, 1998. Remediation and reinstallation
of non-critical computer applications is scheduled to be completed by
December 31, 1999.
Keyport believes that the Year 2000 issue could have a material impact on
Keyport's operations if the four-step plan is not timely implemented.
However, based upon the progress that is being made, Keyport believes that
the timetable for implementing the plan will be met and that the Year 2000
issue will not pose significant operational problems for its computer
systems.
6. Effects of Inflation
Inflation has not had a material effect on the Company's consolidated
results of operations to date. The Company manages its investment portfolio
in part to reduce its exposure to interest rate fluctuations. In general,
the fair value of the Company's fixed maturity portfolio increases or
decreases in inverse relationship with fluctuations in interest rates, and
the Company's net investment income increases or decreases in direct
relationship with interest rate changes. For example, if interest rates
decline the Company's fixed maturity investments generally will increase in
fair value, while net investment income will decrease as fixed maturity
investments mature or are sold and the proceeds are reinvested at reduced
rates. However, inflation may result in increased operating expenses that
may not be readily recoverable in the prices of the services charged by the
Company.
D. General Account Investments
Premium deposits on fixed and equity-indexed annuities are credited to the
Company's general account investments (which at December 31, 1997 totaled
$13.5 billion). To maintain its investment spreads at acceptable levels,
the Company must earn returns on its general account sufficiently in excess
of the fixed or indexed returns credited to policyholders. The key element
of this investment process is asset/liability management. Successful
asset/liability management requires both a quantitative assessment of
overall policy liabilities (including maturities, surrenders and crediting
of interest) and prudent investment of general account assets. The two
most important tools in managing policy liabilities are setting crediting
rates and establishing surrender periods. The investment process requires
portfolio techniques that earn acceptable yields while effectively managing
both interest rate risk and credit risk. The Company emphasizes a
conservative approach to asset/liability management, which is oriented
toward reducing downside risk in adverse markets, as opposed to maximizing
spread in favorable markets. The approach is also designed to reduce
earnings volatility. Various factors can impact the Company's investment
spread, including changes in interest rates and other factors affecting the
Company's general account investments.
The bulk of the Company's general account investments are invested in fixed
maturity securities (83.3% at December 31, 1997). The Company's principal
strategy for managing interest rate risk is to closely match the duration
of its general account investment portfolio to its policyholder balances.
At December 31, 1997, the effective duration of its fixed income portfolio
was approximately 2.9. The Company also employs hedging strategies to
manage this risk, including interest rate swaps and caps. In the case of
equity-indexed products, the Company purchases S&P 500 Index call options
to hedge its obligations to provide participation rate returns. Credit
risk is managed by careful credit analysis and monitoring. At December 31,
1997, the Company's fixed maturity portfolio had an overall average S&P
rating of A+. A portion of the general account investments (7.9% at
December 31, 1997) are invested in below investment grade fixed maturity
securities to enhance overall portfolio yield. Below investment grade
securities pose greater risks than investment grade securities. The
Company actively manages its below investment grade portfolio to optimize
its risk/return profile. There were no non-income producing investments in
the Company's fixed maturity portfolio at December 31, 1997.
As of December 31, 1997, the Company owned approximately $3.5 billion of
mortgage-backed securities (26.2% of its general account investments),
97.4% of which were investment grade. Mortgage-backed securities are
subject to significant prepayment and extension risks, since the underlying
mortgages may be repaid more or less rapidly than scheduled.
As of December 31, 1997, approximately $3.2 billion (23.8% of the Company's
general account investments) were invested in securities which were sold
without registration under the Securities Act and were not freely tradable
under the Securities Act or which were otherwise illiquid. These
securities may be resold pursuant to an exemption from registration under
the Securities Act. If the Company sought to sell such securities, it
might be unable to do so at the then current carrying values and might have
to dispose of such securities over extended periods of time at uncertain
levels.
E. Competition
The Company's business activities are conducted in extremely competitive
markets. Keyport competes with a large number of life insurance companies,
some of which are larger and more highly capitalized and have higher
ratings than Keyport. No one company dominates the industry. In addition,
Keyport's products compete with alternative investment vehicles available
through financial institutions, brokerage firms and investment managers.
Management believes that Keyport competes principally with respect to
product features, pricing, ratings and service; management also believes
that Keyport can continue to compete successfully in this market by
offering innovative products and superior services. In addition, financial
institutions and broker-dealers focus on the insurer's ratings for
financial strength or claims-paying ability in determining whether to
market the insurer's annuities.
F. Employees
As of December 31, 1997, the Company had 412 full-time employees. The
Company provides its employees with a broad range of employee benefit
programs. The Company believes that its relations with its employees are
excellent.
G. Regulation
The Company's business activities are extensively regulated. The following
briefly summarizes the principal regulatory requirements and certain
related matters.
Keyport's retirement-oriented insurance products generally are issued as
individual policies. The policy is a contract between the issuing
insurance company and the policyholder. Policy forms, including all
principal contract terms, are regulated by state law. In most cases, the
policy form must be approved by the insurance department or similar agency
of a state in order for the policy to be sold in that state.
Keyport and Independence are each chartered in Rhode Island and the State
of Rhode Island Insurance Department is their primary oversight regulator.
Keyport and Independence Life also must be licensed by the state insurance
regulators in each other jurisdiction in which they conduct business. They
currently are licensed to conduct business in 49 states (the exception
being New York), and in the District of Columbia. State insurance laws
generally provide regulators with broad powers related to issuing licenses
to transact business, regulating marketing and other trade practices,
operating guaranty associations, regulating certain premium rates,
regulating insurance holding company systems, establishing reserve
requirements, prescribing the form and content of required financial
statements and reports, performing financial and other examinations,
determining the reasonableness and adequacy of statutory capital and
surplus, regulating the type and amount of investments permitted, limiting
the amount of dividends that can be paid and the size of transactions that
can be consummated without first obtaining regulatory approval, and other
related matters. The regulators also make periodic examinations of
individual companies and review annual and other reports on the financial
conditions of all companies operating within their respective
jurisdictions.
Keyport prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the Insurance
Department of the State of Rhode Island. Certain statutory accounting
practices are prescribed by state laws. Permitted statutory accounting
practices encompass all accounting practices that are not proscribed; such
practices may differ between the states and companies within a state. The
National Association of Insurance Commissioners (the "NAIC") currently is
in the process of codifying statutory accounting practices, the result of
which is expected to constitute the only source of prescribed statutory
accounting practices. That project, which is expected to be completed in
1998 may result in changes to the accounting practices that the Company
uses to prepare its statutory-basis financial statements. The impact of
any such changes on the Company's statutory-surplus cannot be determined at
this time. No assurance can be given that such changes would not have a
material adverse effect on the Company.
Risk-Based Capital Requirements. In recent years, various states have
adopted new quantitative standards promulgated by the NAIC. These
standards are designed to reduce the risk of insurance company
insolvencies, in part by providing an early warning of financial or other
difficulties. These standards include the NAIC's risk-based capital
("RBC") requirements. RBC requirements attempt to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. The requirements provide for four different
levels of regulatory attention which implement increasing levels of
regulatory control (ranging from development of an action plan to mandatory
receivership). As of December 31, 1997, Keyport's capital and surplus
exceeded the level at which the lowest of these regulatory attention levels
would be triggered.
Guaranty Fund Assessments. Under the insurance guaranty fund laws existing
in each state, insurers can be assessed for certain obligations of
insolvent insurance companies to policyholders and claimants. Because
assessments typically are not made for several years after an insurer
fails, Keyport cannot accurately determine the precise amount or timing of
its exposure to known insurance company insolvencies at this time. For
certain information regarding the Company's historical and estimated future
assessments, see Note 11 to the Company's Consolidated Financial
Statements. The insolvency of large life insurance companies in future
years could result in material assessments to Keyport by state guaranty
funds.
Insurance Holding Company Regulation. Current Rhode Island insurance law
imposes prior approval requirements for certain transactions with
affiliates and generally regulates dividend payments by a Rhode Island-
chartered insurance subsidiary to its parent company. Keyport may not make
dividend payments in excess of the lesser of (i) 10% of its statutory
surplus as of the preceding December 31 or (ii) its statutory net gain from
operations for the preceding fiscal year without prior approval by the
State of Rhode Island Insurance Department. As of December 31, 1997, such
restriction would limit dividends without such approval to approximately
$70.3 million. Keyport has not paid any dividends since its acquisition in
December, 1988.
KFSC, a subsidiary of Keyport, is regulated as a broker-dealer under the
Exchange Act and is a member of the NASD. (See "Distribution of Contracts
and Certificates".)
COMPANY MANAGEMENT
The following are the principal officers and directors of the Company:
Position with Other Business, Vocation
Keyport or Employment for Past
Name, Age Year of Election Five Years
Kenneth R. Leibler, 48 Chairman of the Board, Chief Executive Officer
12/31/94 of Liberty Financial
Companies, Inc. ("LFC"),
1/1/95; President of
LFC, formerly Chief
Operating Officer of LFC
Frederick Lippitt, 81 Director, 1/31/62, Chairman of The
and Assistant Providence Plan,
Secretary, 4/9/69 Providence, RI
Robert C. Nyman, 61 Director, 4/11/96 Formerly President and
Chairman of Nyman
Manufacturing Co., East
Providence, RI
John W. Rosensteel, 57 President and Chief Chairman of the Board,
Executive Officer, Director and President
12/30/92 of KFSC, 11/12/92;
and Director, 11/5/92 Chairman of the Board,
Director, President and
Chief Executive Officer of
LASC, 1/8/93; President,
Chief Executive Officer,
Chairman of the Board and
Director of Independence
Life and Annuity Company,
10/1/93
Paul H. LeFevre, Jr., 55 Executive Formerly Senior Vice
Vice President, President and Chief
4/10/97 Financial Officer of the
Company, 9/1/95; Director,
1/8/93, and Executive Vice
President, 7/22/97 of
LASC; formerly Senior
Vice President and Chief
Financial Officer of LASC,
1/8/93; Director, 10/1/93,
and Executive Vice
President, 7/28/97, of
Independence Life and
Annuity Company; formerly
Senior Vice President and
Chief Financial Officer of
Independence Life and
Annuity Company, 10/1/93
Bernard R.
Beckerlegge, 51 Senior Vice President Senior Vice President
and General Counsel, and General Counsel of
9/1/95 LASC, 7/22/97; Senior Vice
President and General
Counsel of Independence
Life and Annuity Company,
10/9/95; formerly General
Counsel for B.T. Variable
Insurance Co., 8/1/88
Stephen B. Bonner, 51 Senior Vice President, Senior Vice President
11/7/96 of Independence Life and
Annuity Company, 7/28/97;
formerly President of
Construction Information
Group at McGraw Hill,
2/1/92
Bernhard M. Koch, 43 Senior Vice President Senior Vice President and
and Chief Officer, Chief Financial Officer of
8/7/97 LASC, 7/22/97; Senior Vice
President and Chief
Financial Officer of
Independence Life and
Annuity Company, 7/28/97;
formerly Executive Vice
President and Chief
Financial Officer of Life
Partners Group, 12/1/95;
formerly Senior Vice
President and Chief
Financial Officer of
Laurentian Capital Corp.,
5/1/88
Stewart R.
Morrison, 41 Senior Vice President, Formerly Vice President,
4/10/97, and Chief Investments of the
Investment Officer, Company; Senior Vice
5/16/94 President and Chief
Investment Officer of
LASC, 7/22/97; formerly
Vice President,
Investments of LASC,
1/8/93; Senior Vice
President and Chief
Investment Officer of
Independence Life and
Annuity Company, 7/28/97;
formerly Vice President,
Investments of
Independence Life and
Annuity Company, 10/1/93
Francis E. Reinhart, 57 Senior Vice President, Formerly Chief
4/5/90, and Chief Administrative Officer of
Information Officer, the Company, 4/5/90;
4/10/97 Director, 3/15/95 and
Vice President, 10/24/85,
of KFSC; Senior Vice
President of LASC, 1/8/93;
formerly Chief
Administrative Officer
1/8/93; Senior Vice
President, 10/1/93 and
Chief Information Officer,
7/28/97, of Independence
Life and Annuity Company,
formerly Chief
Administrative Officer
of Independence Life and
Annuity Company, 10/1/93
James P. Greaton, 40 Vice President and Vice President and
Corporate Actuary, Corporate Actuary of
6/12/96 Independence Life and
Annuity Company, 12/31/96;
formerly Valuation
Actuary, Providian Capital
Management, 5/94
Jeffery J. Lobo, 36 Vice President-Risk Formerly Assistant Vice
Management, 6/12/96 President - Director of
Quantitative Research for
the Company, 2/8/95;
formerly Vice President of
Credit Suisse Financial
Products, 11/94; trader
for SBCI Securities (Asia)
Inc., 7/93
Jeffery J.
Whitehead, 41 Vice President, Formerly Controller of the
11/5/92, and Company; Vice President
Treasurer, 5/4/95 and Treasurer of LASC,
5/19/95; Vice President
and Treasurer of
Independence Life and
Annuity Company, 5/19/95
EXECUTIVE COMPENSATION TABLES AND INFORMATION
The tables that appear below, along with the accompanying text and
footnotes, provide information on compensation and benefits for the named
executive officers, in accordance with applicable SEC requirements. All
the data regarding values for stock options pertain to options to purchase
shares of Keyport's parent corporation, Liberty Financial Companies, Inc.
("Liberty Financial"). Such data are hypothetical in terms of the amounts
that an individual may or may not receive, because such amounts are
contingent on continued employment with Keyport and the price of Liberty
Financial's Common Stock ("Common Stock"). All year-end values shown in
these tables for outstanding stock options reflect a price of $37.75 per
share, which was the closing price of the Common Stock on the New York
Stock Exchange on December 31, 1997 (the last trading day of 1997). None
of the named executive officers received any perquisites during 1997
exceeding the lesser of $50,000 or 10% of such officer's total salary and
bonus for such year.
Summary Compensation Table. The following table sets forth compensation
information for the past two fiscal years for each of Keyport's chief
executive officer and the other four most highly compensated executive
officers:
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Name and Restricted Securities
Principal Base Stock Underlying All Other
Position Salary Bonus Awards2 Options
Compensation
During 1997 Year ($) ($)1 ( $) (#) ($)3
John W.
Rosensteel, 1997 420,000 330,000 149,625 18,750 26,937
President 1996 396,500 275,000 -- 22,500 27,994
and Chief
Executive
Officer
Paul H.
LeFevre, Jr., 1997 315,000 205,000 85,500 9,000 24,971
Executive 1996 275,000 155,000 -- 13,500 15,638
Vice
President
Stephen B.
Bonner, (4) 1997 275,000 150,000 64,125 7,500 175,707
Senior Vice 1996 80,754 -- -- 17,414
President
and Chief Sales
Officer
Francis E.
Reinhart, 1997 245,000 115,000 -- 11,250 18,790
Senior Vice 1996 233,000 105,000 -- 11,250 13,136
President
and Chief
Information
Officer
Stewart R.
Morrison, 1997 230,000 130,000 42,750 8,250 13,205
Senior Vice 1996 182,700 54,000 -- 6,000 11,170
President &
Chief
Investment
Officer
1 The amounts presented are bonuses earned in 1997 and paid in 1998, or
earned in 1996 and paid in 1997, respectively.
2 The number of shares and value of restricted stock held by the named
executive officers as of December 31, 1997 is as follows: Mr. Rosensteel:
5,250 shares, $198,188; Mr. LeFevre: 3,000 shares, $113,250; Mr. Bonner:
2,250 shares, $84,938; Mr. Morrison: 1,500 shares, $56,625. All such
shares will vest any time after May 13, 1999 if for a 10 consecutive
trading-day period, the closing price of Liberty Financial's Common Stock
exceeds $41.73. Liberty Financial pays dividends on all such shares, and
the recipients are entitled to retain all such dividends regardless of any
future forfeitures.
3 Consists of (a) in the case of Mr. Rosensteel, $5,000 of insurance
premiums paid by Keyport with respect to term life insurance purchased for
his benefit in each year; (b) contributions under defined contribution
plans for the benefit of the named executive officers, individually as
follows: Mr. Rosensteel, $21,937 in 1997 and $22,994 in 1996; Mr. LeFevre,
$24,971 in 1997 and $15,638 in 1996; Mr. Bonner, $4,125 in 1997 and $0 in
1996; Mr. Reinhart, $18,790 in 1997 and $13,136 in 1996; and Mr. Morrison,
$13,205 in 1997 and $11,170 in 1996; (c) in the case of Mr. Bonner, $75,000
for a signing bonus paid in 1997; and (d) in the case of Mr. Bonner,
$96,582 in 1997 and $17,414 in 1996 of moving expenses reimbursement.
4 Mr. Bonner became an executive officer of Keyport effective November 7,
1996.
Option Grant Table. The following table sets forth certain information
regarding options to purchase Common Stock granted during 1997 by Liberty
Financial to the executive officers named in the above summary compensation
table.
Option Grants in Last Fiscal Year
Potential
Realizable
Value at
Assumed
Annual
Rates
Percent of Stock
Number of of Total Price
Securities Options Appreciation
Underlying Granted to Exercise of Option
Options Employees Price Per Expiration Terms ($)2
Name Granted (#) in 1997 Share($) on Date 1 5% 10%
John W.
Rosensteel 18,750 2.4% 28.50 5/13/07 336,006 851,656
Paul H.
LeFevre, Jr. 9,000 1.2% 28.50 5/13/07 161,311 408,795
Stephen B.
Bonner 7,500 1.0% 28.50 5/13/07 134,426 340,662
Francis E.
Reinhart 11,250 1.4% 28.50 5/13/07 201,639 510,994
Stewart R.
Morrison 6,000 0.8% 28.50 5/13/07 107,541 272,530
1 Each option becomes exercisable in four equal annual installments
commencing on May 14, 1998, and vests in full upon the death, disability or
retirement (after age 60) of the optionee.
2 Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable SEC regulations,
compounded annually from the dates the options were granted until their
expiration dates and, therefore, are not intended to forecast possible
future appreciation in the Common Stock. This table does not take into
account appreciation in the price of the Common Stock after the date of
grant.
Option Exercises and Year-End Values Table. The following table sets forth
certain information regarding (i) the 1997 exercises of stock options and
(ii) the stock options held as of December 31, 1997 by the executive
officers named in the above summary compensation table.
Aggregate Option Exercises in Last Fiscal Year and Aggregate Option Values
at Fiscal Year-End
Number of Value of
Shares Securities Unexercised
Acquired Underlying In-the-Money
Upon Value Unexercised Options at
Exercise Realized Options at Year-End
Name (#) ($) Year-End (#) ($)
Exerci- Unexerci- Exerci- Unexerci-
sable sable sable sable
John W.
Rosensteel 9,450 234,078 86,536 59,359 2,154,228 950,858
Paul H.
LeFevre, Jr. 23,500 677,490 54,373 24,753 1,568,396 358,533
Stephen B.
Bonner ---- ---- ---- 7,500 ---- 69,375
Francis E.
Reinhart 20,200 512,000 16,313 24,191 498,505 329,605
Stewart R.
Morrison 5,062 78,692 ---- 15,190 ---- 253,733
Certain Additional Information Regarding Executive Officer Compensation
Defined Benefit Retirement Programs. Each of the executive officers in the
above summary compensation table participates in Liberty Financial's
Pension Plan and Keyport's Supplemental Pension Plan (collectively, the
"Pension Plans"). The following table shows the estimated annual pension
benefits payable upon retirement for the specified compensation and years
of service classification under the Pension Plans.
Estimated Annual Retirement Benefits at Age 65
under the Pension Plans
Years of Credited Service
Compensation 15 20 25 30 35
$ 200,000 $ 52,178 $ 69,570 $ 86,963 $ 93,629 $100,296
400,000 106,178 141,570 176,963 190,296 203,629
600,000 160,178 213,570 266,963 286,963 306,963
800,000 214,178 285,570 356,963 383,629 410,296
1,000,000 268,178 357,570 446,963 480,296 513,629
1,200,000 322,178 429,570 536,963 576,963 616,963
Benefits under the Pension Plans are based on an employee's average pay for
the five highest consecutive years during the last ten years of employment,
the employee's estimated social security retirement benefit and years of
credited service with Keyport. The current compensation covered by the
Pension Plans for each participating executive officer in the above summary
compensation table is as follows: Mr. Rosensteel, $695,000; Mr. LeFevre,
$470,000; Mr. Bonner, $325,000; Mr. Reinhart, $350,000 and Mr. Morrison,
$305,000. For purposes of determining benefits payable upon retirement
under the Pension Plans, compensation includes base salary and annual
bonus. Benefits are payable in the form of a single-life annuity providing
for monthly payments. Actuarially equivalent methods of payment may be
elected by the recipient. As of December 31, 1997, the executive officers
named in the above summary compensation table had the following full
credited years of service under the Pension Plans: Mr. Rosensteel, 5 years;
Mr. LeFevre, 18 years; Mr. Bonner, 1 years; Mr. Reinhart, 13 years; and Mr.
Morrison, 7 years.
Change of Control Provisions of 1990 Stock Option Plan. Liberty
Financial's 1990 Stock Option Plan, as amended (the "1990 Plan"), provided
for the grant of options to officers and other key employees of Liberty
Financial for the purchase of shares of common stock. As of March 20,
1998, options issued and outstanding under the 1990 Plan included 82,141
shares held by Mr. Rosensteel (69,659 of which were vested), 45,372 shares
held by Mr. LeFevre (all of which were vested); and 16,000 shares held by
Mr. Reinhart (all of which were vested). No additional options will be
granted under the 1990 Plan. Upon a change of control of Liberty Financial
(defined as the transfer of 50% or more of the equity ownership of Liberty
Financial other than solely pursuant to a public offering in which
securities are issued for cash), all non-vested options will automatically
vest and Liberty Financial's Compensation and Stock Option Plan committee
may, in its discretion, elect to cancel all outstanding options by paying
the holders thereof an amount equal to the difference between the formula
value of the Common Stock (as defined in the 1990 Plan) and the exercise
price of the options.
Compensation of Directors. Directors of Keyport who are also employees
receive no compensation in addition to their compensation as employees of
Keyport. The two outside directors (Lippitt and Nyman) receive $2,000 per
quarter, plus $500 for each meeting of the Board of Directors and $200 for
each Audit Committee meeting that they attend. Three meetings of the Board
of Directors and two meetings of the Audit Committee are scheduled
annually.
LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to its
business. In the opinion of Keyport's management, the resolution of such
litigation is not expected to have a material adverse effect on the
Company's financial condition or results of operations.
EXPERTS
The consolidated financial statements including the financial statement
schedules incorporated by reference of Keyport Life Insurance Company at
December 31, 1997 and 1996, and for each of the two years in the period
ended December 31, 1997, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing and incorporated by reference
elsewhere herein, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Keyport Life Insurance Company for
the year ended December 31, 1995 have been included herein in reliance on
the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
The consolidated financial statements of Keyport and also Liberty Financial
and its subsidiaries, including Keyport, for the year ended December 31,
1997 and 1996 have been audited and reported upon by Ernst & Young LLP
("E&Y").
For fiscal years prior to 1996, the consolidated financial statements of
Keyport and Liberty Financial and its subsidiaries, were audited and
reported on by KPMG Peat Marwick LLP ("KPMG"). On March 13, 1996,
following a competitive proposal process, Liberty Financial's Audit
Committee terminated KPMG's appointment as independent accountants for
Liberty Financial and its audited subsidiaries, including Keyport,
effective March 14, 1996, and voted to recommend to the Liberty Financial
Board of Directors that E&Y be appointed as Liberty Financial's
independent accountants for fiscal year 1996. The Liberty Financial Board
of Directors approved this recommendation on April 10, 1996. On April 11,
1996 Keyport's Board of Directors approved such engagement of E&Y.
In connection with the audit of Keyport's financial statements for the year
ended December 31, 1995, and the subsequent interim period through March
14, 1996, there were no disagreements between Keyport and KPMG on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not
resolved to KPMG's satisfaction would have caused KPMG to make reference to
the subject matter of the disagreement in connection with KPMG's audit
report on the financial statements of Keyport. In addition, the audit
report of KPMG on the financial statements of Keyport for the year ended
December 31, 1995 did not contain any adverse opinion or disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty or
audit scope.
LEGAL MATTERS
Legal matters with respect to the organization of Keyport, its authority to
issue annuity contracts and the validity of the Certificates, as well as
matters relating to the Federal securities laws, have been passed upon by
Bernard R. Beckerlegge, General Counsel. In addition, certain matters
relating to the Federal securities laws have been passed upon by Jorden
Burt Boros Cicchetti Berenson & Johnson LLP as Special Counsel for Keyport.
Report of Independent Auditors
The Board of Directors
Keyport Life Insurance Company
We have audited the consolidated balance sheet of Keyport Life Insurance
Company as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholder's equity, and cash flows for the years
then ended. Our audits also included the financial statement schedules
listed in the Index at Item 16. These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Keyport Life Insurance Company at December 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information
set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 1998
Independent Auditors' Report
The Board of Directors Keyport Life Insurance Company
We have audited the consolidated financial statements of Keyport Life
Insurance Company and subsidiaries for the year ended December 31, 1995,
included herein. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement Schedule III ("the
financial statement schedule") as of December 31, 1995 and for the year
then ended, also included herein. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the results of operations and cash
flows for Keyport Life Insurance Company and subsidiaries for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects, the information
set forth therein.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 16, 1996
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31
ASSETS 1997 1996
Cash and investments:
Fixed maturities available for sale
(amortized cost: 1997 - $10,981,618;
1996 - $10,500,431) $11,246,539 $10,718,644
Equity securities (cost: 1997 - $21,950;
1996 - $19,412) 40,856 35,863
Mortgage loans 60,662 67,005
Policy loans 554,681 532,793
Other invested assets 440,773 183,622
Cash and cash equivalents 1,162,347 767,385
Total cash and investments 13,505,858 12,305,312
Accrued investment income 165,035 146,778
Deferred policy acquisition costs 232,039 250,355
Value of insurance in force 53,298 70,819
Income taxes recoverable 22,537 323
Intangible assets 18,058 19,186
Other assets 16,175 40,316
Separate account assets 1,329,189 1,091,468
Total assets $15,342,189 $13,924,557
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $12,086,076 $11,637,528
Current income taxes - 13,123
Deferred income taxes 133,003 25,747
Payable for investments purchased and loaned 722,116 211,234
Other liabilities 34,015 38,476
Separate account liabilities 1,263,958 1,017,667
Total liabilities 14,239,168 12,943,775
Stockholder's equity:
Common stock, $1.25 par value; authorized
8,000 shares; issued and outstanding 2,412
shares 3,015 3,015
Additional paid-in capital 505,933 505,933
Net unrealized investment gains 82,277 73,599
Retained earnings 511,796 398,235
Total stockholder's equity 1,103,021 980,782
Total liabilities and
stockholder's equity $15,342,189 $13,924,557
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Year ended December 31
1997 1996 1995
Revenues:
Investment income $ 847,048 $ 790,365 $ 755,930
Interest credited to policyholders (594,084) (572,719) (555,725)
Investment spread 252,964 217,646 200,205
Net realized investment gains
(losses) 24,723 5,509 (3,958)
Fee income:
Surrender charges 15,968 14,934 14,772
Separate account fees 17,124 15,987 13,154
Management fees 3,261 2,613 1,841
Total fee income 36,353 33,534 29,767
Expenses:
Policy benefits (3,924) (3,477) (4,448)
Operating expenses (49,941) (43,815) (44,475)
Amortization of deferred policy
acquisition costs (75,906) (60,225) (58,541)
Amortization of value of insurance
in force (10,490) (10,196) (9,479)
Amortization of intangible assets (1,128) (1,130) (1,130)
Total expenses (141,389) (118,843) (118,073)
Income before income tax expense 172,651 137,846 107,941
Income tax expense (59,090) (47,222) (38,331)
Net income $ 113,561 $ 90,624 $ 69,610
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(in thousands)
Net
Unrealized
Additional Investment
Common Paid-in Gains Retained
Stock Capital (Losses) Earnings Total
Balance,
January 1, 1995 $3,015 $505,933 $ (64,464) $238,001 $ 682,485
Net income 69,610 69,610
Change in net
unrealized
investment
gains (losses) 150,236 150,236
Balance,
December 31, 1995 3,015 505,933 85,772 307,611 902,331
Net income 90,624 90,624
Change in net
unrealized
investment
gains (losses) (12,173) (12,173)
Balance,
December 31, 1996 3,015 505,933 73,599 398,235 980,782
Net income 113,561 113,561
Change in net
unrealized
investment
gains (losses) 8,678 8,678
Balance,
December 31, 1997 $ 3,015 $505,933 $ 82,277 $511,796 $1,103,021
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31
1997 1996 1995
Cash flows from operating
activities:
Net income $ 113,561 $ 90,624 $ 69,610
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Interest credited to
policyholders 594,084 572,719 555,725
Net realized investment
(gains) losses (24,723) (5,509) 3,958
Amortization of value of
insurance in force and
intangible assets 11,618 11,326 10,609
Net amortization on
investments 29,862 (29,088) 9,688
Change in deferred policy
acquisition costs (10,252) (24,403) (24,630)
Change in current and
deferred income taxes 66,919 4,938 1,953
Net change in other assets
and liabilities 1,746 (42,634) (62,375)
Net cash provided by
operating activities 782,815 577,973 564,538
Cash flow from investing activities:
Investments purchased -
available for sale (4,543,374) (4,363,074) (2,851,013)
Investments sold -
held to maturity - - 14,930
Investments sold -
available for sale 2,563,465 1,714,023 605,197
Investments matured -
held to maturity - - 317,773
Investments matured -
available for sale 1,531,693 1,387,664 906,522
Increase in policy loans (21,888) (34,467) (21,033)
Decrease in mortgage loans 6,343 7,500 54,947
Other assets purchased, net (48,921) (130,087) -
Value of business acquired,
net of cash - (30,865) -
Net cash used in
investing activities (512,682) (1,449,306) (972,677)
Cash flows from financing
activities:
Withdrawals from policyholder
accounts (1,320,837) (1,154,087) (933,785)
Deposits to policyholder
accounts 950,472 2,134,504 1,116,975
Securities lending 495,194 (119,083) 317,715
Net cash provided by
financing activities 124,829 861,334 500,905
Change in cash and
cash equivalents 394,962 (9,999) 92,766
Cash and cash equivalents
at beginning of year 767,385 777,384 684,618
Cash and cash equivalents at
end of year $ 1,162,347 $ 767,385 $ 777,384
See accompanying notes.
KEYPORT LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1997
1. Accounting Policies
Organization
Keyport Life Insurance Company offers a diversified line of fixed, indexed,
and variable annuity products designed to serve the growing retirement
saving market. These annuity products are sold through a wide ranging
network of banks, agents, and securities dealers.
The Company is a wholly owned subsidiary of Stein Roe Services Incorporated
("Stein Roe"). Stein Roe is a wholly owned subsidiary of Liberty Financial
Companies, Incorporated ("Liberty Financial") which is a majority owned,
indirect subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
Principles of Consolidation
The consolidated financial statements include Keyport Life Insurance
Company and its wholly owned subsidiaries, Independence Life and Annuity
Company ("Independence Life"), Liberty Advisory Services Corporation, and
Keyport Financial Services Corp., (collectively the "Company").
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities. All significant intercompany transactions
and balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Investments
Investments in debt and equity securities classified as available for sale
are carried at fair value, and after-tax unrealized gains and losses (net
of adjustments to deferred policy acquisition costs and value of insurance
in force) are reported as a separate component of stockholder's equity. The
cost basis of securities is adjusted for declines in value that are
determined to be other than temporary. Realized investment gains and
losses are calculated on a first-in, first-out basis.
On December 31, 1995, pursuant to the "Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities,"
the Company made a one-time reclassification of certain fixed maturity
securities from held to maturity to available for sale. The amortized cost
of those securities at the time of transfer was $1.4 billion, and the
unrealized gain of $13.9 million was recorded net of taxes in stockholder's
equity.
For the mortgage backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments over the estimated economic life of the
security. When actual prepayments differ significantly from anticipated
prepayments, the effective yield is recalculated to reflect actual payments
to date and anticipated future payments and any resulting adjustment is
included in investment income.
Mortgage loans are carried at amortized cost. Policy loans are carried at
the unpaid principal balances plus accrued interest. Partnerships are
accounted for by using the equity method of accounting. Partnership
investments totaled $117.3 million and $72.6 million at December 31, 1997
and 1996, respectively.
Derivatives
The Company uses interest rate swap and cap agreements to manage its
interest rate risk and call options on the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500 Index") to hedge its obligations to provide
returns based upon this index.
The Company utilizes interest rate swap agreements ("swap agreements") and
interest rate cap agreements ("cap agreements") to match assets more
closely to liabilities. Swap agreements are agreements to exchange with a
counterparty interest rate payments of differing character (e.g., fixed-
rate payments exchanged for variable-rate payments) based on an underlying
principal balance (notional principal) to hedge against interest rate
changes. The Company currently utilizes swap agreements to reduce asset
duration and to better match interest rates earned on longer-term fixed
rate assets with interest rates credited to policyholders.
Cap agreements are agreements with a counterparty which require the payment
of a premium for the right to receive payments for the difference between
the cap interest rate and a market interest rate on specified future dates
based on an underlying principal balance (notional balance) to hedge
against rising interest rates.
Hedge accounting is applied after the Company determines that the items to
be hedged expose it to interest rate or price risk, designates the
instruments as hedges, and assesses whether the instruments reduce the
indicated risks through the measurement of changes in the value of the
instruments and the items being hedged at both inception and throughout the
hedge period. From time to time, interest rate swap agreements, cap
agreements and call options are terminated. If the terminated position was
accounted for as a hedge, realized gains or losses are deferred and
amortized over the remaining lives of the hedged assets or liabilities.
Conversely, if the terminated position was not accounted for as a hedge, or
if the assets and liabilities that were hedged no longer exist, the
position is "marked to market" and realized gains or losses are immediately
recognized in income.
The net differential to be paid or received on interest rate swap
agreements is recognized as a component of net investment income. Premiums
paid for interest rate cap agreements are deferred and amortized to net
investment income on a straight-line basis over the terms of the
agreements. The unamortized premium is included in other invested assets.
Amounts earned on interest rate cap agreements are recorded as an
adjustment to net investment income. Interest rate swap agreements and cap
agreements hedging investments designated as available for sale are
adjusted to fair value with the resulting unrealized gains and losses
included in stockholder's equity.
Premiums paid on call options are amortized to net investment income over
the terms of the contracts. The call options are included in other
invested assets and are carried at amortized cost plus intrinsic value, if
any, of the call options as of the valuation date. Changes in intrinsic
value of the call options are recorded as an adjustment to interest
credited to policyholders.
Fee Income
Fees from investment advisory services are recognized as revenues when
services are provided. Revenues from fixed and variable annuities and
single premium whole life policies include mortality charges, surrender
charges, policy fees, and contract fees and are recognized when earned.
Deferred Policy Acquisition Costs
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. Such
costs include commissions, costs of policy issuance, underwriting, and
selling expenses. These costs are deferred and amortized in relation to
the present value of estimated gross profits from mortality, investment
spread, and expense margins. Deferred policy acquisition costs are
adjusted for amounts relating to unrealized gains and losses on fixed
maturity securities the Company has designated as available for sale. This
adjustment, net of tax, is included with the change in net unrealized
investment gains or losses that is credited or charged directly to
stockholder's equity. Deferred policy acquisition costs have been
decreased by $126.9 million at December 31, 1997 and decreased by $103.7
million at December 31, 1996, relating to this adjustment.
Value of Insurance in Force
Value of insurance in force represents the actuarially-determined present
value of projected future gross profits from policies in force at the date
of their acquisition. This amount is amortized in proportion to the
projected emergence of profits over periods not exceeding 15 years for
annuities and 25 years for life insurance. Interest is accrued on the
unamortized balance at the contract rate of 5.34%, 5.30% and 5.58% for the
years ended December 31, 1997, 1996 and 1995, respectively.
The value of insurance in force is adjusted for amounts relating to the
recognition of unrealized investment gains and losses. This adjustment,
net of tax, is included with the change in net unrealized investment gains
or losses that is credited or charged directly to stockholder's equity.
Value of insurance in force has decreased by $31.8 million at December 31,
1997 and decreased by $26.0 million at December 31, 1996, relating to this
adjustment.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1997 is as follows (in thousands): 1998 - $8,701; 1999 -
$10,890; 2000 - $9,926; 2001 - $8,711; 2002 - $7,694; and thereafter -
$39,220.
Intangible Assets
Intangible assets consist of goodwill arising from business combinations
accounted for as a purchase. Amortization is provided on a straight-line
basis over twenty-five years.
Separate Account Assets and Liabilities
The assets and liabilities resulting from variable annuity and variable
life policies are segregated in separate accounts. Separate account assets,
which are carried at fair value, consist principally of investments in
mutual funds. Investment income and changes in asset values are allocated
to the policyholders, and therefore, do not affect the operating results of
the Company. The Company provides administrative services and bears the
mortality risk related to these contracts. As of December 31, 1997 and
1996, Keyport also classified as separate account assets $65.2 million and
$73.8 million, respectively, investments in certain mutual funds sponsored
by affiliates of the Company and other investments.
Policy Liabilities
Policy liabilities consist of deposits received plus credited interest,
less accumulated policyholder charges, assessments, and withdrawals related
to deferred annuities and single premium whole life policies. Policy
benefits that are charged to expense include benefit claims incurred in the
period in excess of related policy account balances.
Income Taxes
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes," and are calculated as if
the companies filed their own income tax returns.
Effective July 18, 1997, due to changes in ownership of Liberty Financial,
the Company is no longer included in the consolidated federal income tax
return of Liberty Mutual. The Company will be eligible to file a
consolidated federal income tax return with Liberty Financial in 2002.
Independence Life, which until July 18, 1997, was required under federal
tax law to file its own federal income tax return, may join with Keyport in
a consolidated income tax return filing. Liberty Advisory Services
Corporation and Keyport Financial Services Corp. must file separate federal
tax returns.
Cash Equivalents
Short-term investments having an original maturity of three months or less
are classified as cash equivalents.
Recent Accounting Pronouncements
In January 1998, the FASB voted to proceed with the drafting of an
accounting standard titled "Accounting for Derivative Instruments and for
Hedging Activities." This accounting standard requires companies to report
derivatives on the balance sheet at fair value with changes in fair value
recorded in income or equity. The accounting standard also changes the
accounting for derivatives used in hedging strategies from traditional
deferral accounting to a current recognition approach which could impact a
company's income statement and balance sheet and expand the definition of a
derivative instrument. The Company is evaluating the impact of this
accounting standard. This accounting standard will become effective in
2000.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). The relevant provisions of
SFAS 125 relating to securities lending, dollar rolls, and other similar
secured transactions become effective in 1998. It is not expected that the
adoption of SFAS 125 will have a material effect on the Company's
consolidated financial position or results of operations.
2. Acquisitions
On August 9, 1996, Keyport entered into a 100 percent coinsurance agreement
for a $954.0 million block of single premium deferred annuities issued by
Fidelity & Guaranty Life Insurance Company ("F&G Life"). Under this
transaction, the investment risk of the annuity policies was transferred to
Keyport. However, F&G Life will continue to administer the policies and
will remain contractually liable for the performance of all policy
obligations. This transaction increased investments by $923.1 million and
value of insurance in force by $30.9 million.
3. Investments
Fixed Maturities
As of December 31, 1997 and 1996, the Company did not hold any investments
in fixed maturities that were classified as held to maturity or trading
securities. The amortized cost, gross unrealized gains and losses, and
fair value of fixed maturity securities are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized
December 31, 1997 Cost Gains Losses Fair Value
U.S. Treasury securities $ 128,580 $ 1,107 $ (40) $ 129,647
Mortgage backed securities
of U.S. government
corporations and agencies 1,089,809 49,536 (1,602) 1,137,743
Debt securities issued by
foreign governments 272,559 12,694 (4,966) 280,287
Corporate securities 4,744,208 189,387 (83,562) 4,850,033
Other mortgage backed
securities 2,325,889 81,886 (2,579) 2,405,196
Asset backed securities 2,200,689 26,178 (3,118) 2,223,749
Senior secured loans 219,884 - - 219,884
Total fixed maturities $ 10,981,618 $360,788 $ (95,867) $11,246,539
Gross Gross
Amortized Unrealized Unrealized
December 31, 1996 Cost Gains Losses Fair Value
U.S. Treasury securities $ 35,308 $ 130 $ (87) $ 35,351
Mortgage backed securities
of U.S. government
corporations and agencies 1,689,989 41,783 (8,618) 1,723,154
Debt securities issued by
foreign governments 246,339 11,718 (554) 257,503
Corporate securities 4,093,473 153,422 (12,298) 4,234,597
Other mortgage backed
securities 2,413,020 47,596 (23,970) 2,436,646
Asset backed securities 1,736,012 15,531 (6,440) 1,745,103
Senior secured loans 286,290 - - 286,290
Total fixed maturities $10,500,431 $270,180 $ (51,967) $10,718,644
At December 31, 1997, gross unrealized gains on equity securities, interest
rate cap agreements and investments in separate accounts aggregated $27.4
million, and gross unrealized losses aggregated $6.9 million, respectively.
At December 31, 1996, gross unrealized gains on equity securities, interest
rate cap agreements and investments in separate accounts aggregated $29.9
million, and gross unrealized losses aggregated $5.3 million, respectively.
Contractual Maturities
The amortized cost and fair value of fixed maturities by contractual
maturity as of December 31, 1997 are as follows (in thousands):
December 31, 1997 Amortized Cost Fair Value
Due in one year or less $ 147,177 $ 147,503
Due after one year through five years 1,925,739 1,926,372
Due after five years through ten years 2,350,299 2,419,857
Due after ten years 942,016 986,119
5,365,231 5,479,851
Mortgage and asset backed securities 5,616,387 5,766,688
$10,981,618 $11,246,539
Actual maturities will differ in some cases from those shown above because
borrowers may have the right to call or prepay obligations.
Net Investment Income
Net investment income is summarized as follows (in thousands):
Year Ended December 31 1997 1996 1995
Fixed maturities $ 811,688 $ 737,372 $ 681,998
Mortgage loans and other
invested assets 27,833 11,422 12,881
Policy loans 32,224 30,188 28,485
Equity securities 5,443 4,494 4,807
Cash and cash equivalents 34,449 36,138 41,643
Gross investment income 911,637 819,614 769,814
Investment expenses (15,311) (12,708) (10,837)
Amortization of options and
interest rate caps (49,278) (16,541) (3,047)
Net investment income $ 847,048 $ 790,365 $ 755,930
There were no non-income producing fixed maturity investments as of
December 31, 1997 or 1996.
Net Realized Investment Gains (Losses)
Net realized investment gains (losses) are summarized as follows (in
thousands):
Year Ended December 31 1997 1996 1995
Fixed maturities held to maturity:
Gross gains $ - $ - $ 1,306
Gross losses - - (64)
Fixed maturities available for sale:
Gross gains 42,464 24,304 8,156
Gross losses (19,146) (17,814) (15,982)
Equity securities (51) 1,492 (405)
Investments in separate accounts 7,912 (576) 1,684
Interest rate swaps - - (860)
Other - (208) (13)
Gross realized investment gains
(losses) 31,179 7,198 (6,178)
Amortization adjustments of deferred
policy acquisition costs
and value of insurance inforce (6,456) (1,689) 2,220
Net realized investment gains (losses) $ 24,723 $ 5,509 $ (3,958)
Proceeds from sales of fixed maturities available for sale were $2.6
billion, $1.7 billion and $565.4 million, for the years ended December 31,
1997, 1996 and 1995, respectively. The sale of fixed maturities held to
maturity during 1995 relate to certain securities, with amortized cost of
$15.0 million, which were sold specifically due to a decline in the
issuers' credit quality.
Deferred tax liabilities for the Company's unrealized investment gains and
losses, net of adjustments to deferred policy acquisition costs and value
of insurance inforce were $44.3 million and $39.5 million at December 31,
1997 and 1996, respectively.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of
stockholder's equity at December 31, 1997.
At December 31, 1997, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic
location.
At December 31, 1997, $1.1 billion of fixed maturities were below
investment grade.
4. Derivatives
Outstanding derivatives, shown in notional amounts along with their
carrying value and fair value, are as follows (in thousands):
Assets (Liabilities)
Carrying Fair Carrying Fair
Notional Amounts Value Value Value Value
December 31 1997 1996 1997 1997 1996 1996
Interest rate cap
agreements $ 250,000 $ 450,000 $ 102 $ 102 $ 1,363 $ 1,363
Indexed call
options - - 323,343 345,294 109,701 122,395
Interest rate
swaps 2,575,000 2,275,000 (42,123) (42,123) (8,753) (8,753)
The interest rate swap agreements expire in 1998 to 2001. The interest
rate cap agreements expire in 1999 through 2000. The call options'
maturities range from 1998 to 2002.
The Company currently utilizes swap agreements to reduce asset duration and
to better match interest rates earned on longer-term fixed rate assets with
interest credited to policyholders. Cap agreements are used to hedge
against rising interest rates. Call options are used for purposes of
hedging the Company's equity-indexed products. The call options hedge the
interest credited on these 1, 5 and 7 year term products, which is based on
the changes in the S&P 500 Index. At December 31, 1997 and 1996, the
Company had approximately $155.0 million and $73.1 million, respectively,
of unamortized premium in call option contracts.
Fair values for swap and cap agreements are based on current settlement
values. The current settlement values are based on quoted market prices
and brokerage quotes, which utilize pricing models or formulas using
current assumptions. Fair values for call options are based on quoted
market prices.
Deferred losses of $5.1 million and $7.9 million as of December 31, 1997
and 1996, respectively, resulting from terminated interest rate swap
agreements are included with the related fixed maturity securities to which
the hedge applied and are being amortized over the life of such securities.
There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is the risk associated with counterparty
nonperformance. The Company believes that the counterparties to its swap,
cap and call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal.
5. Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
Year Ended December 31 1997 1996 1995
Current $ (48,477) $ 52,369 $ 37,746
Deferred 107,567 (5,147) 585
$ 59,090 $ 47,222 $ 38,331
A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as
follows (in thousands):
Year Ended December 31 1997 1996 1995
Expected income tax expense $ 60,427 $ 48,246 $ 37,779
Increase (decrease) in income
taxes resulting from:
Nontaxable investment income (1,416) (1,216) (1,737)
Amortization of goodwill 396 396 396
Other, net (317) (204) 1,893
Income tax expense $ 59,090 $ 47,222 $ 38,331
The components of deferred federal income taxes are as follows (in
thousands):
December 31 1997 1996
Deferred tax assets:
Policy liabilities $ 124,250 $ 171,327
Guaranty fund expense 2,795 6,260
Net operating loss carryforwards 2,111 2,667
Other 1,205 3,915
Total deferred tax assets 130,361 184,169
Deferred tax liabilities:
Deferred policy acquisition costs (56,331) (63,076)
Value of insurance in force and
intangible assets (18,022) (20,539)
Excess of book over tax basis of
investments (178,697) (118,403)
Separate account asset (645) (4,557)
Deferred loss on interest rate swaps (1,792) (2,765)
Other (7,877) (576)
Total deferred tax liabilities (263,364) (209,916)
Net deferred tax liability $ (133,003) $ (25,747)
As of December 31, 1997, the Company had approximately $6.0 million of
purchased net operating loss carryforwards (relating to the acquisition of
Independence Life). Utilization of these net operating loss carryforwards,
which expire through 2006, is limited to use against future profits of
Independence Life. The Company believes that it is more likely than not
that it will realize the benefit of its deferred tax assets.
Income taxes refunded were $8.0 million in 1997 and income taxes paid were
$46.9 million and $44.7 million in 1996 and 1995, respectively.
6. Retirement Plans
Keyport employees and certain employees of Liberty Financial are eligible
to participate in the Liberty Financial Companies, Inc. Pension Plan (the
"Plan"). It is the Company's practice to fund amounts for the Plan
sufficient to meet the minimum requirements of the Employee Retirement
Income Security Act of 1974. Additional amounts are contributed from time
to time when deemed appropriate by the Company. Under the Plan, all
employees are vested after five years of service. Benefits are based on
years of service, the employee's average pay for the highest five
consecutive years during the last ten years of employment, and the
employee's estimated social security retirement benefit. Plan assets
consist principally of investments in certain mutual funds sponsored by an
affiliated company.
The Company also has an unfunded non-qualified Supplemental Pension Plan
("Supplemental Plan") collectively with the Plan, (the "Plans"), to replace
benefits lost due to limits imposed on Plan benefits under the Internal
Revenue Code.
The following table sets forth the Plans' funded status.
December 31 1997 1996
(Dollars in thousands)
Actuarial present value of benefit obligations:
Vested benefit obligations $ 8,374 $ 7,172
Accumulated benefit obligation $ 9,500 $ 7,963
Projected benefit obligation $ 12,594 $ 10,559
Plan assets at fair value (7,801) (6,399)
Projected benefit obligation in excess of the
Plans' assets 4,793 4,160
Unrecognized net actuarial loss (1,727) (1,496)
Prior service cost not yet recognized in net
periodic pension cost (160) (183)
Accrued pension cost $ 2,906 $ 2,481
The assumptions used to develop the actuarial present value of the
projected benefit obligation and the expected long-term rate of return on
plan assets are as follows:
Year Ended December 31 1997 1996 1995
Pension cost includes the following components:
Service cost benefits earned during the period $ 804 $ 717 $ 541
Interest cost on projected benefit obligation 829 725 603
Actual return on Plan assets (898) (732) (999)
Net amortization and deferred amounts 396 357 600
Total net periodic pension cost $1,131 $1,067 $ 745
Discount rate 7.25% 7.50% 7.25%
Rate of increase in compensation level 5.00% 5.25% 5.25%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
The Company provides various other funded and unfunded defined contribution
plans, which include savings and investment plans and supplemental savings
plans. For each of the years ended December 31, 1997, 1996 and 1995,
expenses related to these defined contribution plans totaled (in thousands)
$702, $590 and $595, respectively.
7. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the fair value of the Company's financial instruments. The
aggregate fair value amounts presented herein do not necessarily represent
the underlying value of the Company, and accordingly, care should be
exercised in deriving conclusions about the Company's business or financial
condition based on the fair value information presented herein.
The following methods and assumptions were used by the Company in
determining fair values of financial instruments:
Fixed maturities and equity securities: Fair values for fixed
maturity securities are based on quoted market prices, where
available. For fixed maturities not actively traded, the fair values
are determined using values from independent pricing services, or, in
the case of private placements, are determined by discounting expected
future cash flows using a current market rate applicable to the yield,
credit quality, and maturity of the securities. The fair values for
equity securities are based on quoted market prices.
Mortgage loans: The fair value of mortgage loans are determined by
discounting future cash flows to the present at current market rates,
using expected prepayment rates.
Policy loans: The carrying value of policy loans approximates fair
value.
Other invested assets: With the exception of call options, the
carrying value for assets classified as other invested assets in the
accompanying balance sheets approximates their fair value. Fair
values for call options are based on market prices quoted by the
counterparty to the respective call option contract.
Cash and cash equivalents: The carrying value of cash and cash
equivalents approximates fair value.
Policy liabilities: Deferred annuity contracts are assigned fair
value equal to current net surrender value. Annuitized contracts are
valued based on the present value of the future cash flows at current
pricing rates.
The fair values and carrying values of the Company's financial instruments
are as follows (in thousands):
December 31 1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturity securities $11,246,539 $11,246,539 $10,718,644 $10,718,644
Equity securities 40,856 40,856 35,863 35,863
Mortgage loans 60,662 63,007 67,005 73,424
Policy loans 554,681 554,681 532,793 532,793
Other invested assets 440,773 462,724 183,622 196,316
Cash and cash equivalents 1,162,347 1,162,347 767,385 767,385
Liabilities:
Policy liabilities 12,086,076 11,366,534 11,637,528 11,127,352
8. Quarterly Financial Data, in thousands (unaudited)
Quarter Ended 1997 March 31 June 30 September 30 December 31
Investment income $ 206,515 $ 210,655 $ 210,365 $ 219,513
Interest credited to
policyholders (147,313) (147,224) (150,875) (148,672)
Investment spread 59,202 63,431 59,490 70,841
Net realized
investment gains 12,796 2,669 4,951 4,307
Fee income 8,252 8,578 9,841 9,682
Pretax income 47,423 39,914 39,876 45,438
Net income 31,538 26,095 26,377 29,551
Quarter Ended 1996 March 31 June 30 September 30 December 31
Investment income $ 187,728 $ 188,334 $ 200,253 $ 214,050
Interest credited to
policyholders (138,109) (136,161) (146,071) (152,378)
Investment spread 49,619 52,173 54,182 61,672
Net realized
investment gains
(losses) 2,052 (2,487) 755 5,189
Fee income 7,769 8,006 9,015 8,744
Pretax income 30,340 29,650 34,575 43,281
Net income 19,688 19,943 22,289 28,704
9. Statutory Information
The Company is domiciled in Rhode Island and prepares its statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the State of Rhode Island Insurance Department.
Statutory surplus and statutory net income differ from stockholder's equity
and net income reported in accordance with GAAP primarily because policy
acquisition costs are expensed when incurred, policy liabilities are based
on different assumptions, and income tax expense reflects only taxes paid
or currently payable. The Company's statutory surplus and net income are as
follows (in thousands):
Year Ended December 31 1997 1996 1995
Statutory surplus $ 702,610 $ 567,735 $ 535,179
Statutory net income 107,130 40,237 38,264
10. Transactions with Affiliated Companies
The Company reimbursed Liberty Financial and certain affiliates for
expenses incurred on its behalf for the years ended December 31, 1997, 1996
and 1995. These reimbursements included corporate, general, and
administrative expenses, corporate overhead, such as executive and legal
support, and investment management services. The total amounts reimbursed
were $7.8 million for the years ended December 31, 1997 and 1996 and $7.6
million for the year ended December 31, 1995. In addition, certain
affiliated companies distribute the Company's products and were paid $7.2
million, $6.4 million and $7.6 million by the Company for the years ended
December 31, 1997, 1996, and 1995, respectively.
Keyport has mortgage notes in the original principal amount of $100.0
million on properties owned by certain indirect subsidiaries of Liberty
Mutual. The notes were purchased for their face value. Liberty Mutual has
agreed to provide credit support to the obligors under these notes with
respect to certain payments of principal and interest thereon. As of
December 31, 1997 and 1996, the amounts outstanding were $39.5 million.
Dividend payments to Liberty Financial from the Company are governed by
insurance laws which restrict the maximum amount of dividends that may be
paid without prior approval of the State of Rhode Island Insurance
Department. As of December 31, 1997, the maximum amount of dividends
(based on statutory surplus and statutory net gains from operations) which
may be paid by Keyport was approximately $70.3 million without such
approval.
11. Commitments and Contingencies
Leases: The Company leases data processing equipment, furniture and certain
office facilities from others under operating leases expiring in various
years through 2008. Rental expense (in thousands) amounted to $3,408,
$3,213 and $3,221 for the years ended December 31, 1997, 1996 and 1995,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 1997, the following are the minimum future rental payments
under noncancelable operating leases having remaining terms in excess of
one year (in thousands):
Year Payments
1998 $ 3,536
1999 3,505
2000 3,273
2001 3,178
2002 288
Thereafter 1,248
$ 15,028
Legal Matters: The Company is involved at various times in litigation
common to its business. In the opinion of management, provisions made for
potential losses are adequate and the resolution of any such litigation is
not expected to have a material adverse effect on the Company's financial
condition or its results of operations.
Regulatory Matters: Under existing guaranty fund laws in all states,
insurers licensed to do business in those states can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. The actual amount of such assessments will depend upon the final
outcome of rehabilitation proceedings and will be paid over several years.
In 1997, 1996 and 1995, the Company was assessed $5.9 million, $10.0
million, and $8.1 million, respectively. During 1997, 1996 and 1995, the
Company recorded $1.0 million, $1.0 million, and $2.0 million,
respectively, of provisions for state guaranty fund association expense. At
December 31, 1997 and 1996, the reserve for such assessments was $8.0
million and $12.9 million, respectively.
APPENDIX A
FORMULA FOR INDEX INCREASES AND/OR DECREASES, AND ILLUSTRATION OF INDEX
INCREASES AND INDEX DECREASES
The Certificate provides that the Index Increase or Index Decrease is to be
calculated on each Sub-Account Anniversary. On the first Sub-Account
Anniversary in a Term, the formula for the Index Increase or Decrease, if
any, is:
A x ((C-D)/D x (E/F) x G
This calculation provides the proportionate credit for any change in the
S&P Index from its value at the beginning of the Term to its value on the
first Sub-Account Anniversary.
For every Sub-Account Anniversary after the first in a Term, the
calculation of the Index Increases or Index Decreases, if any, is the sum
of two parts:
Part 1 represents the proportionate credit for an increase (if any) in the
S&P Index from its prior highest Sub-Account Anniversary value to its value
on the current Sub-Account Anniversary. The formula for Part 1 is:
A x ((C-B)/D) x (E/F) x G
Part 2 represents the proportionate credit for an increase(s) or
decrease(s) (if any) in the S&P Index occurring on a prior Sub-Account
Anniversary(ies). The formula for Part 2 is:
A x ((B-D)/D) x (1/F) x G
where:
A is the Participation Rate for the Term
B is the highest S&P Index Value on all Sub-Account Anniversaries,
excluding the S&P Index value at the beginning of the Term and on the
current Sub-Account Anniversary. The value of B can never be less
than the Minimum S&P Index Value nor greater than the Maximum S&P
Index value. The Minimum S&P Index Value and the Maximum S&P Index
Value are defined below.
C is the value of the S&P Index on the current Sub-Account Anniversary,
not less than B or greater than the Maximum S&P Index Value for the
Term.
D is the S&P Index value at the beginning of the Term
E is the number of completed Sub-Account Years in the Term
F is the total number of Sub-Account Years in the Term
G is the smaller of the Indexed Value at the beginning of the term and
the Indexed Value (prior to the crediting of any Index Increases
and/or Decreases) on any Sub-Account Anniversary in the Term,
including the current Sub-Account Anniversary
The Minimum S&P Index Value and the Maximum S&P Index Value are defined as
follows:
Minimum S&P Index Value = [(Floor / Participation Rate for Term) + 1] x
[Beginning of Term S&P Index Value]
Maximum S&P Index value = [(Cap / Participation Rate for Term) + 1] x
[Beginning of Term S&P Index Value]
Using the assumptions below, we have prepared the following six
illustrations using different assumptions as to changes in the S&P Index
value during the course of the Term. THESE ASSUMPTIONS AND ILLUSTRATIONS
ARE NOT AND ARE NOT INTENDED AS PREDICTIONS OF CHANGES IN THE S&P INDEX
DURING THE COURSE OF ANY TERM. THE S&P INDEX MAY RISE OR FALL DURING THE
COURSE OF A TERM, AND AT THE END OF A TERM THE S&P INDEX VALUE MAY BE
HIGHER OF LOWER THAN AT THE BEGINNING OF THE TERM. KEYPORT MAKES NO
PREDICTIONS, REPRESENTATIONS, OR GUARANTEES AS TO FUTURE CHANGES IN THE S&P
INDEX. THESE VALUES ARE BASED ON THE ASSUMPTION THAT NO PARTIAL SURRENDERS
ARE MADE.
Illustration No. 1
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = [(80%/80%) + 1] x 500 = 1,000
Floor = 0%
Minimum S&P Index Value = [(0%/80%) + 1] x 500 = 500
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 600 20% 500 600 $ 3,200 N/A $103,200.00
2 690 38% 600 690 $ 5,760 $ 3,200 $112,160.00
3 775 55% 690 775 $ 8,160 $ 6,080 $126,400.00
4 900 80% 775 900 $16,000 $ 8,800 $151,200.00
5 1035 107% 900 1,000 $16,000 $12,880 $180,000.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 2
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = -5%
Minimum S&P Index Value = 468.75
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 450 -10% 468.75 468.75 -1,000.00 N/A $ 99,000.00
2 425 -15% 468.75 468.75 0.00 -990.00 $ 98,010.00
3 450 -10% 468.75 468.75 0.00 -980.10 $ 97,029.90
4 430 -14% 468.75 475.00 0.00 -970.30 $ 96,059.60
5 400 -20% 468.75 475.00 0.00 -960.60 $ 95,099.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 3
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = -10%
Minimum S&P Index Value = 437.50
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 450 -10% 437.50 450.00 -1,600.00 N/A $ 98,400.00
2 485 -3% 450.00 485.00 2,204.16 -1,574.40 $ 99,029.76
3 500 0% 485.00 500.00 1,416.96 -472.32 $ 99,974.40
4 520 4% 500.00 520.00 2,519.04 0.00 $102,493.44
5 550 10% 520.00 550.00 4,723.20 629.76 $107,846.40
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 4
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = none
Minimum S&P Index Value = unlimited
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 450 -10% <1,000 450 -1,600.00 N/A $ 98,400.00
2 425 -15% 450 450 0.00 -1,574.40 $ 96,825.60
3 450 -10% 450 450 0.00 -1,549.21 $ 95,276.39
4 475 -5% 450 475 3,048.84 -1,524.42 $ 96,800.81
5 400 -20% 475 475 0.00 -762.21 $ 96,038.60
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 5
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = -5%
Minimum S&P Index Value = 468.75
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 450 -10% 468.75 468.75 -1,600.00 N/A $ 99,000.00
2 425 -15% 468.75 468.75 0.00 -990.00 $ 98,010.00
3 450 -10% 468.75 468.75 0.00 -980.10 $ 97,029.90
4 475 -5% 475.00 475.00 776.24 -970.30 $ 96,835.84
5 400 -20% 475.00 475.00 0.00 -774.69 $ 96,061.15
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
Illustration No. 6
Assumptions:
Term Length (Years) = 5
Beginning Indexed Value = $100,000
Beginning S&P Index Value = 500
Participation Rate = 80%
Cap = 80%
Maximum S&P Index Value = 1,000
Floor = none
Minimum S&P Index Value = unlimited
End Value Change Value Value Value Value
of of in of of of of Indexed
Year INDEX INDEX B* C Part 1 Part 2 Value
0 500 $100,000.00
1 650 30% <1,000 650 4,800 N/A $104,800.00
2 485 -3% 650 650 0 4,800 $109,600.00
3 475 -5% 650 650 0 4,800 $114,400.00
4 450 -10% 650 650 0 4,800 $119,200.00
5 430 -14% 650 650 0 4,800 $124,000.00
* Although B has a value on the first anniversary, it is part of the
formula for the calculation of Index Increases on the first
Anniversary, but is used as a comparison value in the calculation of
C.
APPENDIX B
CALCULATION OF THE DEATH BENEFIT
In calculating the Death Benefit of an Index Sub-Account, the Certificate
provides for the recalculation of the applicable Index Increase or
Decrease. Set forth below is the formula for calculating the Death Benefit
of an Index Sub-Account and the factors specified in the Certificate for
recalculating the applicable Index Increase or Index Decrease.
If the Floor is greater than 0%, the Death Benefit is the greater of the
Indexed Value as of the date of death less any subsequent partial
surrenders, and the Surrender Value.
In all other situations, the Death Benefit is the greater of (a) minus (b)
and the Surrender Value where:
(a)is the Indexed Value at the start of the Sub-Account year in which
death occurs, with the applicable Index Increase or Index Decrease (see
"Appendix A") recalculated as follows: "E" is equal to "F" and "(B-D)" is
multiplied by the sum of 1.0 plus the number of Sub-Account years from the
start of such year to the end of the Term; and
(b)is the sum of any partial surrenders since the start of such year.
In either case, if death occurs in the last year of a Term and the
surrender occurs after the end of the Term, the death benefit is equal to
the greater of the Indexed Value at the end of such Term, less any
subsequent partial surrenders, and the Surrender Value.
APPENDIX C
SCHEDULE OF STATE PREMIUM TAXES
Non-Qualified Qualified
Contracts/Certificates Contracts/Certificates
State Rate of Tax Rate of Tax
Alabama 1.00% 1.00%
California 2.35 0.50
District of Columbia 2.00 2.00
Kansas 2.00 0.00
Kentucky 2.00 2.00
Maine 2.00 0.00
Mississippi 2.00 0.00
Nevada 3.50 0.00
North Carolina 1.75 0.00
South Dakota 1.25 0.00
Virgin Islands 5.00 5.00
West Virginia 1.00 1.00
Wyoming 1.00 0.00
APPENDIX D
TELEPHONE INSTRUCTIONS
Telephone Transfers of Values of Certificate Owner Account
1. If there are joint Certificate Owners, both must authorize Keyport to
accept telephone instructions, but either Certificate Owner may give
Keyport telephone instructions.
2. All callers will be required to identify themselves. Keyport reserves
the right to refuse to act upon any telephone instructions in cases
where the caller has not sufficiently identified himself/herself to
Keyport's satisfaction.
3. Neither Keyport nor any person acting on its behalf shall be subject
to any claim, loss, liability, cost or expense if it or such person
acted in good faith upon a telephone instruction, including one that
is unauthorized or fraudulent; however, Keyport will employ reasonable
procedures to confirm that a telephone instruction is genuine and, if
Keyport does not, Keyport may be liable for losses due to an
unauthorized or fraudulent instruction. The Certificate Owner thus
bears the risk that an unauthorized or fraudulent instruction that is
executed may cause the values of a Certificate Owner Account to be
lower than it would be had no instruction been executed.
4. All conversations will be recorded with disclosure at the time of the
call.
5. The application for the Certificate may allow a Certificate Owner to
create a power of attorney by authorizing another person to give
telephone instructions. Unless prohibited by state law, such power
will be treated as durable in nature and shall not be affected by the
subsequent incapacity, disability, or incompetency of the Certificate
Owner. Either Keyport or the authorized person may cease to honor the
power by sending written notice to the Certificate Owner at the
Certificate Owner's last known address. Neither Keyport nor any
person acting on its behalf shall be subject to liability for any act
executed in good faith reliance upon a power of attorney.
6. Telephone authorization shall continue in force until (a) Keyport
receives the Certificate Owner's written revocation, or (b) Keyport
discontinues the privilege.
7. Telephone transfer instructions received by Keyport at 800-367-3653
before the close of trading on the New York Stock Exchange
("NYSE")(currently 4:00 p.m. Eastern Time) will be initiated that day
based on the unit value prices calculated at the close of that day.
Instructions received after the close of trading on the NYSE will be
initiated the following business day.
8. Once instructions are accepted by Keyport, they may not be canceled.
9. All transfers must be made in accordance with the terms of the
Certificate and current prospectus. If the transfer instructions are
not in good order, Keyport will not execute the transfer and will
notify the caller within 48 hours.
Distributed by:
Keyport Financial Services Corp.
125 High Street, Boston, MA 02110-2712
Issued by:
Keyport Life Insurance Company
125 High Street, Boston, MA 02110-2712
DIA 1712.5/98